All guidesUpdated 5 minute read
FIFO means first in, first out: the units you bought first are treated as the units you sell first. When the same product arrives at different prices, FIFO gives each sale the cost of the batch it really came from, so the profit of each order is right.
The problem FIFO solves
You rarely pay the same price twice. A deal runs out, a supplier puts the price up, a wholesale order is cheaper for each unit than the first small one. So the same product sits on your shelf at two or three different costs.
When one unit sells, which cost do you use? If you guess, or use the latest price for everything, the profit of every order is a little wrong, and the errors add up over a month.
How it works
Each delivery is kept as its own batch, with its own cost for each unit. A sale takes from the oldest batch that still has units. When that batch is empty, the next sale takes from the next batch.
| Batch 1: 20 units at £3.20 | £64.00 |
|---|---|
| Batch 2: 30 units at £3.65 | £109.50 |
| 25 sold: 20 from batch 1 | £64.00 |
| 25 sold: 5 from batch 2 | £18.25 |
| Cost of the 25 units sold | £82.25 |
Why an average is not the same
The average cost of those 50 units is £3.47. Use it for the 25 sold and the cost comes to £86.75, which is £4.50 more than what those units really cost. Nothing was lost or gained, the profit only moved to the wrong month. With many products and many deliveries, that movement is large enough to hide a product that loses money.
FIFO also tells you what is left. The 25 units still on the shelf are all from batch 2, so the stock is worth £91.25, not an average.
Count the whole cost of a delivery
- The price of the goods.
- Delivery to you, shared across the units of that delivery.
- Import duty or customs charges, if there are any.
- A discount or cashback that lowered what you paid.
Returns and missing deliveries
When a buyer returns an item you can sell again, it goes back into stock at the cost it had. When it cannot be sold, its cost is a loss.
Sometimes an item sells before you have written its delivery down. Use the cost of the last batch as an estimate, mark it as an estimate, and correct it when the delivery is recorded.
Which costing method your accounts must use depends on where you are and how you trade. Ask your accountant. This guide explains the arithmetic and is not tax advice.
How Sellcount does this for you
In Sellcount every delivery becomes its own batch. Each sale takes its cost from the oldest batch, an estimated cost is marked until the delivery settles it, and the page of any order shows which batch its cost came from.