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Everything You Need to Know About the Retail Inventory Method

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The Retail Inventory Method (RIM) enjoys some popularity among businesses due to its value in providing informed estimates of the inventory, especially while dealing with time limitation and/or pipeline inventory. While it has some notable pros, the method has some limitations as well. This article aims to highlight all the noteworthy details about the retail inventory method, such as who can use it and when and how it can be used.

What is the Retail Inventory Method?

The retail inventory method is an inventory accounting method used to estimate the ending worth of your merchandise inventory by measuring the cost of inventory with reference to the price of the merchandise. It enables retailers to achieve inventory value estimates in a hassle-free manner.

Who Should Use the Retail Inventory Method?

While retailers in general can use the retail inventory method, it is better suited to specialty retailers, retailers with multiple stores, and those with warehouse stocks, since it’s mainly used while dealing with pipeline inventory or time constraints.

Specialty Retailers

Businesses that deal in products with similar cost-to-retail ratio or markups can benefit more from the RIM. However, if your business involves selling a range of product categories with different markups, then this method won’t be the best choice for you.

Retailers with Multiple Stores

If you are a multi-store retailer, running operations in various locations, and often in need of a quick update of your inventory status, RIM will provide you updates at a glance.

Retailers with Warehouse Stocks

The cost of products that are stored in eCommerce warehouses is comparatively less volatile; therefore, the retail inventory method can also offer accurate results to retailers owning warehouse stocks.

How Should You Use the Retail Inventory Method? 

Using the Retail Inventory Method requires following a step-by-step procedure:

1. Calculate the cost-to-retail percentage

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

2. Determine cost of goods sold (COGS) 

Cost of goods sold= beginning inventory cost + cost of purchases

3. Determine cost of sales

Cost of sales = sales * cost-to-retail percentage

4. Calculate ending inventory value

Ending inventory value = cost of goods still available for sale – cost of sales

When Should You Use the Retail Inventory Method?

Using the RIM calculation during times when product markups are volatile isn’t recommended. Now that we know what this technique is and who can take advantage of it, here is info regarding when you should utilize it

When your business requires inventory value estimations

Since the retail inventory method only provides estimated values, and not absolutely accurate readings, it should be used when you need an approximate inventory value. RIM does not provide information regarding damaged, lost, or stolen goods.

When dealing with merchandise that has a consistent mark-up percentage

The retail inventory method is not an appropriate choice for businesses dealing with products that have different markups. However, when the merchandise has a consistent mark-up percentage, you may use this technique.

When you need insights into cost-to-retail ratio

The cost-to-retail ratio informs retailers about the percentage that goods are marked up from the wholesale purchase price to their retail sales price. You can use the retail inventory method to gain insights into this ratio, so you can adjust accordingly.

What are the Advantages and Disadvantages of RIM?

Advantages of the Retail Inventory Method

Some noteworthy advantages of the RIM are:

  • RIM provides quick estimates of retail merchandise value that are particularly helpful when retailers are dealing with time constraints.
  • It is a great choice for retailers who deal with predictable inventory that has a consistent markup value.
  • Most importantly, RIM provides estimates of retail goods in transit.

Disadvantages of the Retail Inventory Method

The RIM has quite a few limitations that make it a temporary solution that is used as a substitute only. These are:

  • It does not work well for products with fluctuating markups due to changing market conditions.
  • It is dependent on accurate and automated demand forecasting.

Useful Tips and Tricks for the Retail Inventory Method

If you feel that the retail inventory method is for you. Here are a few tips to help you make the most of it.

Use the Most Accurate Data

The retail inventory method is dependent on some statistics such as the value of the beginning inventory, the cost-to-retail ratio, etc. To properly utilize the technique, you need to get the most accurate data, so feel free to use software with robust reporting and analytics capabilities and the ability to produce fast and real-time data.

Pair Retail Estimates with Physical Counting

As stated earlier, the retail inventory method (RIM) is merely an estimation of the ending inventory value and it does not account for lost, stolen, broken, or damaged goods nor does it provide an accurate count of the ending inventory. Therefore, you can not completely replace the physical counting of inventory with this approach. To get accurate results, always pair retail estimates with physical counting when you aren’t running short on time and tally the readings.

Employ Retail Inventory Method in Conjunction with the Overall Stock Management Practice

The retail inventory method is not a technique that works great as a standalone approach; rather, it has many limitations that require it to be used as part of a bigger and more elaborate inventory management strategy. It’s a useful method, but it’s not perfect and has its limitations. Pair it with a barcode scanner app, physical counts, and an agile retail management system.

When you partner with a 3PL fulfillment center like ShipBots, you get an efficient inventory management system, including barcoding, inventory cycle counts, and retail inventory management. Every item we store, pack, ship and receive are barcoded to ensure accuracy. Our inventory management software also helps you track each and every step of your order fulfillment process. Get in touch with us today to learn more about how we can help you optimize your retail fulfillment process.