Alongside this, optimizing team structures by reviewing spans of control, hierarchical or matrix structures, or implementing a renewed RACI chart boosts efficiencies and drives productivity. As mentioned, hiring and onboarding costs drain company finances, and recruitment costs only increase in line with inflation. Let’s explore the leading profitability obstacles every business is facing in 2025 and why overcoming them requires intentional, out-of-the-box strategies. Compare this with an average net profit margin of 8.54% across all industries, and you’ll get a sense of what a ‘good’ profit margin looks like for you. If you’d like to find out how Linnworks can revolutionize your approach to inventory management, book a free demo today. Simple adjustments to your website can skyrocket your revenue and make big strides in your profitability with minimal effort.
This is because it helps accurately valuing ending inventory at current market prices, giving a better representation of the business’s financial position. For businesses dealing with perishable goods or products that go out of fashion quickly, FIFO might be the best choice. On the other hand, if your inventory consists of durable, non-perishable items, LIFO could offer tax benefits, especially in times of inflation. In a rising price environment, FIFO (First-In, First-Out) results in lower Cost of Goods Sold (COGS) because the older, cheaper inventory is sold first. Additionally, the ending inventory will be higher as it consists of the more expensive, newer inventory.
- FIFO is often preferred in industries where the costs of goods tend to increase over time.
- Specifically, many budget tools automatically populate your strategic plan by combining previous spending data and future external market trends.
- WAC reduces pricing confusion by offering a single, averaged cost for all inventory, allowing businesses to set prices more confidently.
- If you’d like to find out how Linnworks can revolutionize your approach to inventory management, book a free demo today.
- Simple adjustments to your website can skyrocket your revenue and make big strides in your profitability with minimal effort.
Bringing in more money and reducing expenses are the two core building blocks of driving profitability. In the world of ecommerce, managing your inventory is crucial to maintaining profitability. One key factor that can significantly impact your bottom line is how you calculate the cost of that inventory. Accurate time tracking is the key to profitability, enabling you to lift the lid on inefficiencies, resource optimization, and billing rates to improve your bottom line. In a world where costs are rising and competition is increasingly fierce, driving profitability is challenging for even the most talented CROs. Employee development is beneficial for morale and a great way to improve productivity.
Why is it important to understand the effects of inventory costing methods on financial statements?
Conversely, LIFO (Last-In, First-Out) results in higher COGS because the newer, more expensive inventory is sold first. The ending inventory will be lower as it consists of the older, cheaper inventory. When examining ending inventory, FIFO will reflect a smaller balance, as it retains the less expensive, more recently acquired inventory. In contrast, LIFO will show a higher ending inventory value, as it leaves the older, more expensive items in stock. This relationship is essentially the opposite of what occurs in a rising price environment, where FIFO would yield lower COGS and higher profits, while LIFO would result in higher COGS and lower profits.
Q. How does your choice of inventory costing approach impact taxes?
Understanding the impact of inventory valuation methods—FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and average cost—is crucial for analyzing financial statements. Each method influences the calculation of Cost of Goods Sold (COGS), which in turn affects gross profit, net income, and ending inventory values. Our solution also determine which method will result in higher profitability when inventory costs are rising. helps you implement the inventory costing method that best fits your business, providing real-time insights and ensuring that your inventory valuation is always accurate. This level of automation not only saves time but also helps you stay competitive and profitable in a fast-paced ecommerce environment. Inventory management software, such as Linnworks, can be invaluable in simplifying the inventory costing process. By automating the tracking of stock levels, sales, and inventory costs across multiple sales channels, Linnworks allows businesses to manage their inventory efficiently.
Q: What are the different inventory costing methods?
- WAC is ideal for ecommerce sellers with large volumes of similar items, as it offers a streamlined approach to pricing and inventory management.
- During this time, yearly inflation has ranged between 4% and 8%, labor costs continue to increase by around 4.5% per quarter, and some businesses have reported a 40% increase in supply costs.
- Conversely, the Last-In, First-Out (LIFO) method sells the most recently acquired inventory first, which in a falling price environment means that the lower-cost items are recognized in COGS.
- Even with the right metrics, best customers, and high gross profit margins, increasing profitability is no easy task.
Linnworks helps thousands of ecommerce businesses worldwide to take control of their inventory, and to manage their ecommerce operations from a single, centralized HQ. James Elliott is an APMQ and MSP-certified project professional and writer from London. James has 8 years’ experience leading projects and programs for tech, travel, digital, and financial services organizations, managing budgets in excess of £5m and teams of 30+. James writes on various business and project management topics, with a focus on content that empowers readers to learn, take action, and improve their ways of working. Businesses are always looking for new and innovative ways to increase revenue with pricing strategies that grow the value per customer. If you’re a business owner, executive, finance professional, or Chief Revenue Officer (CRO) looking for new and innovative ways to boost profits, this is the article for you.
Inventory costing method FAQs
In a rising price environment, FIFO results in lower COGS, higher gross profit, and higher ending inventory, while LIFO leads to higher COGS and lower gross profit. Conversely, in a falling price environment, FIFO incurs higher COGS and lower ending inventory, while LIFO shows the opposite. Understanding these effects is crucial for accurate financial reporting and decision-making in accounting. WAC offers simplicity and consistency, making it a popular choice for ecommerce businesses with rapidly changing inventory prices.
Often, it’s about stripping things back to basics to uncover opportunities to reduce costs or drive additional revenue while being disciplined about the spending choices made across your businesses. Even with the right metrics, best customers, and high gross profit margins, increasing profitability is no easy task. This is because the global economic market is still so uncertain, with positive forecasts for growth (3.3% in 2025), offset by lingering inflation rates of 4.2%. FIFO can also result in lower taxable income during periods of rising prices, as older, lower-cost inventory is matched with current sales. For many ecommerce businesses, the best method is one that aligns with their pricing strategy, stock turnover rate, and tax planning objectives.
Step 3: Choose the right tools to support you
This results in a Cost of Goods Sold (COGS) and ending inventory value that falls between those calculated using FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). In a rising price environment, the average cost method will show COGS higher than FIFO but lower than LIFO, and ending inventory lower than FIFO but higher than LIFO. This method provides a middle-ground approach, reducing the extremes seen with FIFO and LIFO, and can be useful for companies with stable inventory costs.
How to Increase Profitability: Strategies from CROs for Success
With the rise of artificial intelligence, these tools are becoming increasingly sophisticated. They predict risk events and issues before they occur and offer recommendations on how to optimize costs. It’s usually best to start small with automation so your business processes work as expected. From there, you can scale up to maximize the effectiveness and ROI of your technology investment.
This sort of development is especially important in startups and small businesses, where teams often have to wear many hats without the right training to do those roles properly. The old saying ‘work smarter, not harder’ has never been truer for modern businesses as they look for ways to do more with their limited resources. Mismanaged resources, such as time, money, or labor, lead to operating cost inefficiency. Keeping rising costs under control requires creative solutions, with many businesses completing cost audits to identify costs that can be stripped out of their operations. Alongside this, businesses are also looking at ways to reallocate resources, develop partnerships, and outsource to reduce costs further.
Higher prices drive higher business costs, making it increasingly tough to maintain profitability. But for most shareholders, investors, or senior executives, the data doesn’t matter — they’re still pushing their teams to achieve strong profit margins. FIFO is often preferred in industries where the costs of goods tend to increase over time.
Whether optimizing costs or finding ways to boost sales and revenue, several great tools on the market help CROs (and their colleagues) boost profitability. A clear strategy for when, where, and why you spend money is fundamental to driving profitability. While all businesses must evolve, not every project or initiative is essential, meaning sometimes it’s better to say no. As the cost of goods continues to rise, we predict the average profit margin will squeeze further, impacting financial performance. This will create an increased drive for operational efficiency and growth in new markets. Focusing on new and innovative profitability strategies is essential to achieving your business goals.