KPI of the Day – Retail: $ Stock value
Measures the value of the existing stock at the end of the month.
To indicate the value of the unsold inventory, as this affects the following month’s inventory.
Inventory is one of the most valuable assets a retail company owns. This is both the case with physical stores and e-commerce merchants. In addition, $ Stock value is an important item on any company’s financial statements. Therefore, measuring $ Stock value on a regular basis is not only a beneficial process, but a legal requirement for businesses.
There are three main valuation methods:
1. First-in-first-out (FIFO) – the costs of sales are determined by the cost of the items purchased the earliest;
2. Last-in-first-out (LIFO) – the costs of sales are determined by the cost of the items purchased the latest. It should be noted that depending on the industry, LIFO may not be allowed for tax purposes;
3. Weighted average cost (WAC) – the costs of sales are determined by the average cost of the items purchased, determined at the time of sale.
From an accounting point of view, the value is to be reported as a current asset and is usually listed after cash and accounts receivable, since these have a higher degree of liquidity.
In order for the result to reflect the real status of a company’s business and financial situation, the best valuation method should be determined in accordance to the nature of the products sold, the industry and the country. Most importantly, the inventory tracking method should be chosen with great care: periodic or perpetual.
In the first case, the sales are monitored constantly, however, inventory levels are updated, as the name suggests, periodically. The assessment method in this case relies on a physical count of the inventory, which is resource-consuming and thereby recommended only for businesses with a small amount of inventory, which do not need or cannot afford an electronic tracking system.
In the case of a perpetual inventory system, the inventory on hand is recorded and calculated in real time, thereby providing results for $ Stock value at all times.
Recommendations for working with this indicator include the following:
- Utilizing software programs in order to have an overview on inventory at all times;
- Monitoring this indicator together with other KPIs such as $ Revenue, # Reorder point or % Obsolescence costs, in order to assess the efficiency of inventory management practices;
- Focusing on increasing sales if $ Stock value is too high; this can be done by making use of promotions, discounts and loyalty reward programs.
Inventory is valued usually at cost or at the market value, whichever is lower. In addition to the cost of purchasing the inventory itself, costs of inventory may also include all costs that make the inventory available for sale, such as duty, freight and, in the case of manufacturers, factory labor and overhead.