What Is the Retail Inventory Method and How Do You Use It

If you are a retailer or anything of the sort, your inventory should be your primary concern. To calculate the value of your stock, the retail inventory method is perhaps the most helpful way to take care of it. Sometimes, you’ll need the help of shipping and logistics companies to move or ship your inventory. However, not all inventory methods work for every single type of retailer. That’s why you need to learn about the retail inventory method and how to use it. Four Winds Saudi Arabia offers help in terms of shipping and freight services, but we can also help with guides. The best way to keep your business and inventory organized is to look into this method and see if it fits you.

What exactly does “Retail Inventory Method” mean?

Retail Inventory Method, or RIM for short, is an accounting technique for roughly estimating the ending worth of your store’s inventory. This approach calculates value by comparing the price you, the retailer, paid for the goods to the price you charge for them when you sell them. Keep in mind though that this method serves as a tool to help with manual inventory count. Like every other method for inventory counting, this method has its own pros and cons.

A man standing in front of whiteboard wondering what the retail inventory method is.
Not all people know about this inventory management method.
  • This method’s biggest advantage is its simplicity. You can quickly calculate the amount of inventory you have and get an estimate of it. Your budgeting and purchase selections can then be influenced by this.
  • However, this method provides an estimate rather than a 100% accurate value. In other words, the RIM won’t always give you an accurate state of your inventory and stock.
  • For retailers without a reliable cost-to-retail ratio, this method isn’t as effective. It won’t provide you with an exact inventory value if your profit margins differ from one product to another.

So, if you get a batch of products by air freight to Saudi Arabia and then sell it, this method could help you determine your stocks. As we mentioned earlier, this inventory counting method’s efficiency heavily depends on your business. That being said, there are certain types of retailers that can make the most of this inventory method.

  • Multi-store retailers can use this method to estimate how much they’re carrying quickly.
  • Retailers who use warehouses to store their stocks may find this method the most useful. The cost of goods held in warehouses remains rather steady. As such, the formula for the retail inventory approach will produce more accurate results. 
  • Retailers who have consistent markups and similar products will benefit from this.

How to use the retail inventory method efficiently: a step-by-step list

Using this method of inventory counting isn’t as complex as it may seem. The whole process consists of a few simple steps, and yet can greatly help you out with calculating your costs.

For starters, let’s say you receive goods from a freight forwarder in Dammam. The first step to contribute to this inventory method is to calculate the cost of goods available for sale. You could receive and buy multiple copies of the same product over a course of time: just keep adding the numbers up. 

A calculator and tools on white table surface.
The retail inventory method is rather simple to use.

Next up, calculate the sales of your inventory. In other words, find out how much revenue you got from selling said products from your inventory

The next step in this inventory method is to calculate the cost-to-retail percentage. You can do this by subtracting the cost of goods from your inventory from the retail price.

Lastly, you have two different ways to complete this last step of this inventory method. You do it by subtracting the cost of sales from the cost of goods available for sale. However, you can also use a formula by first calculating the cost-to-retail percentage, and then use the following formula: cost of goods for sale minus the sales times the cost-to-retail percentage.

All in all, it’s not a very complex process, and with basic knowledge of maths or a calculator, it can be made simpler. It will also greatly help you when you need to figure out a budget next time you opt for custom clearance and freight forwarding for your next batch of products.

Make your job easier with the help of proper tools, companies, and programs

Thankfully, technology has greatly improved and advanced, allowing people like you to manage inventory and retail with ease. Using a good retail inventory management system such as Lightspeed can make the otherwise tedious process of handling inventory goods and resources much easier. 

Another good way to make business and inventory management easier is by hiring good companies. For example, let’s say you need a new product for your inventory and as such need to hire a freight forwarder China to Saudi Arabia. If you hire a good and reputable company with good testimonies and reviews, chances are you’ll have a pleasant experience. Not only will it be a pleasant experience, but it will also make it easier for you to manage deliveries, keep track of your inventory and income, and make your retail better overall.

Two people shaking hands.
With the help of good companies and tools, managing your inventory will be easy.

In Conclusion

We hope this article explained what retail inventory method is effectively. But, we also hope you’ve learned things such as who should and shouldn’t try this method out. Remember that, while you can benefit from this method more than a different retailer or vendor, you should still avoid abandoning physical inventory counts and checks. Last but not least, equip yourself with a good management system and work with the best shipping and freight companies. In Saudi Arabia, Four Winds can help your business grow. Contact us and we can make an arrangement today.

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