Retail Inventory Method: What it is and How it’s Calculated

Convenience store worker manually taking inventory

Running a retail or convenience store can be challenging, especially when you’re trying to grow your business. To succeed in today’s market, it’s important to stay ahead of the curve and overcome any obstacles that come your way. Regardless of the type of store you run, inventory is a key metric for any DTC (direct-to-consumer) business.

But it can be one of the biggest obstacles that can not only cost you more but also drain your time. You have hundreds or thousands of SKUs that serve your growing customer base.

To make sure that it doesn’t cost you a small fortune, you always need to monitor inventory counts, ensuring that inventory records are completely accurate. While it may seem that counting inventory isn’t a challenging task, when it comes to moving tens of thousands of units through the supply chain, counting each item manually becomes impossible.

This could ultimately result in stalling operations, underutilized labor, inaccurate financial reporting, and much more. To prevent these issues from happening, many retailers rely on the retail inventory method to account for their inventory.

A retail inventory method allows you to calculate your inventory without performing a physical inventory count. This method was created to help retailers save time they spend on counting and managing inventory.

But what is the Retail Inventory Method?

Today’s guide will help you learn more about the Retail Inventory Method (RIM) and how to run calculations.

What Is Retail Inventory Method?

The RIM or retail inventory method is defined as an accounting strategy to calculate your inventory over time. It relies on the cost-to-retail ratio i.e., comparing the purchasing cost of your product to the price it is sold for. While it serves as a shortcut to physical inventory count, it’s important to note that it isn’t always 100% accurate. It works best for the products that have the same markup.

For instance, it isn’t the best method if you are calculating the value of wine, which has a 50% markup, and shirts that have a 100% markup. Instead, it works best when you compare the same products.

Understanding The Retail Inventory Method

As a retailer, you probably have invested a lot of cash in stock, which makes sense, as buying inventory is essential to ensure that you have enough product in hand to capture every possible sale.

However, doing physical inventory is one of the most time-consuming tasks most retailers fail to manage. This is where the retail inventory method comes in. It is one of the fastest and most cost-efficient ways to keep a pulse on the value of your inventory every month.

A retail inventory method allows you to monitor your inventory so you can make informed decisions on ordering stocks, the type of merchandise you need to invest in to boost sales, and the type of products to carry.

Why Retail Businesses Should Use the Retail Inventory Method?

The retail inventory method is a helpful tool that assists retailers in managing their inventory. The top reasons why retail businesses should use the retail inventory method are as follows.

1. Simplifies Inventory Count Process

No need to close the doors of your shop to count your inventory. RIM simplifies the inventory count process by allowing you to count your stock at any time. It saves you from spending much time reviewing purchases and invoices.

2. Time & Cost Efficient

RIM is a quick and efficient tool that saves you valuable time in calculating the inventory. It even saves you extra costs that could arise if the workers need to work long hours counting inventory. You can easily manage other business operations without getting worried about the inventory. 

3. Applicable For Any Retail Business

RIM isn’t limited to any certain retail business. Instead, every retail business, regardless of its size and type, can use the retail inventory method. The best part is you don’t need to be an expert or exceptionally good at accounting to get it right.

How To Calculate Inventory by Using Retail Inventory Method

Calculating your monthly ending inventory value by using the retail inventory method isn’t difficult. You need to first figure out the total sales, cost of goods, and cost to retail percentage.

Now, you might be wondering how to get the cost of goods, sales, and cost to retail percentage to find the ending inventory value. Don’t worry, here are the steps that you can follow to calculate the monthly ending inventory. 

Step 1: Calculate Cost-to-Retail Percentage

To calculate the cost-to-retail percentage, you need to divide your cost by the retail price and then multiply it by 100 to get the percentage.

For Example:

If you are selling a bottle of wine at $30 and purchase each bottle at $10, the cost-to-retail percentage would be

Cost/retail price x 100 = cost-to-retail percentage

10/30 x 100= 33.33%

Step 2: Calculate The Cost of Goods Available for Sale

To figure out the cost of goods available for sale, you need to add your beginning inventory cost to the cost of newly purchased inventory.

For Example:

Consider a liquor store’s beginning at-cost inventory was $10,000 (1000 units = $10,000/$10), and it purchased $20,000 (2,000 units = $20,000/$10) worth of additional inventory during the month. So, the cost of goods available for sale would be

Value of Existing Inventory + Value of Newly Purchased Inventory = Cost of Goods Available for Sale

$10,000 + $20,000 = $30,000

Step 3: Calculate the Cost of Sales

To calculate the cost of sales, you need to add all your monthly sales and then multiply the total by your cost-to-retail percentage.

For example:

Consider the liquor store sold $6,000 worth of products ($6,000/10 = 600 units) in the same period and the cost to retail percentage is 33.33%, which we get from the example in step one, then the total sales would be

Sales during the period x cost to retail percentage = cost of sales

$6,000 x 33.33% = $1,999.8

Step 4: Get The Ending Inventory Value

Now, in this final step you need to calculate the ending inventory value. As you have already extracted the figures by performing calculations in steps 1, 2, and 3, it will be easy to get the value. The formula to calculate ending inventory is

Beginning inventory + net purchases – cost of goods sold = ending inventory

$30,000 – $1,999.8 = $28,000.2

Is RIM a Substitute for Inventory Management?

The retail inventory method, or RIM, is a time-saving and cost-effective method, but it’s prone to errors. It can be a good way if it’s only a part of the overall inventory management strategy. Therefore, it’s not a substitute for inventory management.

When you equip your store with a good inventory management system, you can skip the counting and calculating process. A POS system that has a comprehensive built-in inventory feature can help you show your inventory count and its worth in real-time.

A good POS system like Modisoft can help businesses grow exponentially.

When the convenience store chain, Roadtrac, needed a POS solution that could scale with their operations, they turned to Modisoft. With Modisoft’s all-in-one POS system, they were not only able to monitor inventory but also observe a 20% increase in sales.

Calculate Your Retail Inventory Turnover in Seconds

As a business owner, you are already occupied with handling different operations to grow your business. In this situation, calculating retail inventory might seem to be an extra burden on your shoulders.

Therefore, to make the process easy for you, Modisoft provides a Free Retail Inventory Method Calculator design to set you free from unwanted calculations.

Click here to use our Free calculator and save your valuable time.

FAQs

  1. Is There Any Alternative Inventory Method?
Yes, there are 2 common types of inventory methods that you can use. However, it is always recommended to stick to one method when doing calculations to avoid getting inaccurate results.
  • FIFO the First In, First Out (FIFO) method uses the COGS of the oldest items in your inventory to calculate the overall value of your stocks. It involves dividing the COGS for the items purchased first by the number of units purchased.
  • LIFO the Last In, First Out (LIFO) method is the exact opposite of the FIFO method. It is calculated based on COGS for the newest items in your inventory. The formula is dividing the COGS for items purchased last by the number of units purchased.

  1. Is the Retail Inventory Method Accepted by GAAP?
Yes, the retail inventory method is an acceptable inventory valuation approach for U.S. GAAP (Generally Accepted Accounting Principles).

  1. What Is the Beginning & Ending Inventory in Retail Inventory Method?
Beginning inventory refers to the value of goods that you, the retailer, have in the stock at the start of the month (accounting period). While the ending inventory refers to the value of goods/products that are still in stock at the end of the same month (accounting period).

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