I Know Exactly What I Paid For It
If only it was as easy as knowing what you paid for the item in the first place, then you wouldn’t need to spend your time reading articles like this. But unfortunately the world is a lot more complicated than that, especially once you get attorneys or accountants involved. You are more than welcome to attempt to attempt to charge the seller whatever you please, but when and if they get any professional assistance in analyzing the purchase you better be able to justify the pricing model. Typically, there are only 5 methods used to effectively manage and value a business’s inventory, so the problem is no unconquerable if you would prefer to do things correctly.
1) Lower of Cost or Market (LCM):
The name really describes it well as you place the value on either figure depending which is lower, what your originally paid or what you can currently replace it at. Sometimes getting an accurate estimate for the latter can be a little difficult, especially when dealing with used or hard to find items, but with all of the open market places readily accessible online it is not impossible.
Take all of your inventory costs for a specified period of time, say a year, add them up and divide then by the total number of items. If there is any instability to the inventory pricing in your business this method can come in handy as it can give a more accurate picture of what to expect. Using more complicated statistical calculations can enhance this technique, such as Standard Deviation or median, but take a little more work.
3) Specific Identification:
For many bigger ticket items, it sometimes makes more sense to treat each item individually so that a clear picture can be obtained regarding the true cost involved. A marine dealer for would want to include all repairs and storage fees associated with each boat.
4) Last In, First Out (LIFO):
Human nature is a powerful force and we need to keep peoples natural propensities in mind even when trying to accurately price inventory or associated costs. Most stock people are just not going to rotate the inventory when restocking, they will instead place the newer items first. These will thus be the most likely to sell and this method uses that exact logic to figure out the valuation.
First In, First Out (FIFO):
If your inventory has a shelf life then it is very important you have processes in place that attempt to ensure that the older items are the first to sell. This method is very similar to the one previously mentioned except you are now focusing on the oldest inventory to get the valuation.
Figuring out the best way to price the inventory can have many implications for a business owner. From the Profit and Loss to tax liability, it is very important that these figures are carefully considered for reasons beyond just selling your business. Calculating the total cost can be a little more complicated then following the above mentioned methods as there are often times loosely associated expenses that have been incurred. It costs money in order to have employees stock and maintain inventory as well as the fees you paid to have it delivered in the first place. How far you would like to take these calculations is truly up to you, but just make sure that you are going to be adding value in some way for any potential buyer if your intention is to sell. Otherwise, you are going to end up spending a lot of time on an intellectual exercise that no one is going to care much about and that won’t make you a dime.