Stitch’s ‘Feature of the Month’ is here! In this monthly series, we highlight an operational or logistical challenge one of our customers or prospective customers are facing, and share details into how Stitch’s inventory management software can help to solve these common challenges.
This month’s feature highlight? Advanced Purchase Orders.
Challenge: Understanding the True Cost of Inventory
As brands grow, financials play an increasingly important role in maximizing business efficiency and profitability. The journey inventory takes from the supplier to the consumer can include a number of different changes along the way. From the time purchase orders are placed to the time goods are received at a warehouse or 3PL, all or portions of the purchase order could encounter a number of possible situations such as delays and lost orders that affect timelines, cost, and quantity received. Because of this, brands need a way to streamline their accounting and financial reporting to more dynamically and accurately reflect extra costs, fees, and tariffs often associated with product manufactured overseas.
As a result, brands often need to account for these discrepancies either manually or through antiquated processes. This requires double-work for the operations team, and makes it harder for the accounting and finance teams to get a hold of accurate, financial data in order to capture the true cost of inventory.
Stitch Solution: Advanced Purchase Orders
In our July Feature, we highlighted the ease of creating purchase orders within Stitch. Equally important in the purchasing process is the ability to provide accurate costs for the finance team.
Stitch’s advanced purchase order functionalities allow for operations teams to edit purchase orders after receipt with accurate cost adjustments to capture any landed costs relating to inventory. This eliminates the need for double-entry and manual work on the operations team, and provides the accounting and finance teams with accurate and auditable inventory financials.
This functionality in Stitch is made possible due to Stitch’s support for the FIFO (first-in-first-out) accounting costing methodology — a more accurate view of inventory financials compared to Average Unit Cost (AUC) methodology.
What is FIFO Costing vs. AUC?
The FIFO model serves as a way to more accurately reflect each and every purchasing decision made, and helps brands understand how these decisions affect the bottom-line and profitability. FIFO takes into consideration the diminishing value of aging inventory and costs associated with each product due to varying shipping costs, duties, discounts, and taxes which arms brands with the ability to understand true COGS and ending inventory value.
There are a number of situations where brands would require first-in-first-out to better account for expenses made to have a particular product ready for sale. This unique model allows brands to understand how every change in cost is applied, provides brands with multiple ways to siphon cost data, and streamline how brand’s financial teams aggregate numbers. In most cases, competing software (short of a costly and cumbersome Enterprise Resource Planning solution) only provide brands with Average Unit Cost — calculated by dividing the total number of products for sale by the cost of the goods in the inventory itself. While AUC may be the preferable costing method in certain cases, generally AUC lacks accuracy and auditability of true inventory cost compared to the FIFO costing method which can track cost down to the individual purchase order and even line item with Stitch. FIFO is able to more accurately account for fluctuating costs in the industry so brands can plan for the future and report profit accordingly.
Stitch’s ability to support FIFO costing methods arms brands with the ability to use advanced purchase order functionalities. A purchase order can be edited both before and after receipt of goods so that landed costs can be updated throughout the purchasing lifecycle. Stitch’s FIFO capabilities account for costs associated at the warehouse level as well. That way, products with the same SKU that have different associated costs –such as shipping, fulfillment, and manufacturing–can be accurately accounted for.
Since product costs and fees vary according to a number of different components, the taxes on those products may be different by year’s end. FIFO arms brands with a way to simplify, audit, and adapt. The AUC model falls short when accommodating for these dynamic variables in the market. By allowing for more accurate financials and reporting through FIFO costing, brands can more accurately understand financials which lead to informed purchasing decisions and greater future profitability. At Stitch, we strive to streamline processes and allow room for your brand to grow and experiment; a very important part of that is accounting for all changes made throughout the get-to-market timeline.