What is the FIFO Method? A Step-by-Step Guide

Inventory management is a critical aspect of any business, influencing its profitability and operational efficiency.

Among the various methods of inventory management, the First In, First Out (FIFO) method is a popular choice.

This method ensures that older inventory is used or sold before newer inventory, helping businesses maintain accurate financial records and reduce the risk of obsolescence.

Below we’ll outline precisely what the FIFO method is, why companies use it, provide a practical example of FIFO calculations and offer a step-by-step guide on how to execute FIFO inventory management properly in your business.

What is FIFO Inventory Management?

The FIFO method is an inventory management technique that operates on a simple principle: the first items added to the inventory are the first to be used or sold.

This means that the oldest products are sold or consumed before newer ones. It is a common strategy for managing perishable goods, such as food items, as well as non-perishable products in various industries.

The underlying logic of FIFO is akin to real-life scenarios. Consider a queue of people at a bank. Customers join the line in the order they arrive, and bank tellers serve them in the same order, starting with the customer who arrived first. The first customer in, is also the first customer out.

FIFO inventory management operates on a similar principle, ensuring that goods do not sit unused for extended periods, which could lead to financial losses.

Why do companies use FIFO?

Several compelling reasons drive companies to implement the FIFO inventory management method:

Accurate financial reporting

FIFO helps businesses report their financials more accurately. By selling older inventory first, the cost of goods sold (COGS) better matches current market prices. This makes it much easier to assess a company's financial health.

Calculate higher profits

As time passes, the cost of goods typically rises. When you calculate the variance between the current selling price of a product and the historical inventory cost to your business, you're likely to observe higher profits compared to products you acquire at present.

Reduced risk of obsolescence

FIFO minimises the risk of holding onto outdated or expired inventory. It ensures that older products are sold first, decreasing the chances of having obsolete stock.

Preserving product quality

For businesses dealing with perishable goods, FIFO ensures that older items are used before newer ones. This preserves the quality of the inventory and reduces waste.


FIFO is straightforward to implement and understand, making it an attractive choice for small businesses and those new to inventory management.

How do you calculate FIFO?

The FIFO method is determined by summing up the expenses associated with the initial items of inventory that were sold.

For instance, if 10 units of inventory were recently sold, you would total the prices of the first 10 items initially acquired as inventory, which would constitute the cost of goods sold.

The specific valuation method employed may result in variations in the cost of these 10 items.

FIFO vs LIFO: What is the difference?

While FIFO is widely used, there is another common method called Last In, First Out (LIFO). The primary difference between these two methods is the order in which inventory is used or sold:

FIFO (First In, First Out)
  • Oldest inventory is used first.
  • Matches older inventory with current market prices.
  • Commonly used in industries where product quality is important and perishable items need to be sold before they expire.
LIFO (Last In, First Out)
  • Newest inventory is used first.
  • Matches newer inventory with current market prices.
  • Commonly used in industries where inventory tends to appreciate in value over time, such as precious metals.
The choice between FIFO and LIFO depends on various factors, including industry norms and the nature of the inventory.

How to execute FIFO inventory management properly

Implementing FIFO correctly is crucial for its effectiveness.
Here's a step-by-step guide on how to execute FIFO inventory management properly:

  1. Organise your inventory

The first step in executing FIFO inventory management involves maintaining a well-organised inventory system. Properly label products with purchase dates or batch numbers for easy tracking of item ages.

2.Train your staff

Educate your team about the FIFO method and its importance. Everyone involved in handling inventory should understand the process.

3.Establish a system

Use a reliable inventory management system or software to help you keep track of inventory levels and monitor the order of goods.

4.Regularly review stock

Periodically assess your inventory to identify older items that need to be sold or used first. This prevents stock from becoming stagnant.

5.Rotate stock

Physically move older inventory to the front or top of the shelves or storage areas. This makes it more accessible and reminds employees to use it first..

6.Label products clearly

Clearly mark products with their purchase date or batch number. This information helps staff identify the oldest items.

7.Train your suppliers

If possible, communicate your FIFO strategy to suppliers. Request that they deliver newer items behind the older ones to simplify the process.

8.Fulfill customer orders thoughtfully

When fulfilling customer orders, ensure that you select products with the earliest expiration or purchase date.

9.Regularly audit your system

Periodically audit your inventory management system to ensure that it's consistently following the FIFO method.

10.Stay compliant

Keep track of any tax regulations or accounting standards related to your inventory method. Consult with financial experts or accountants if necessary.

Manage your inventory the right way with The Sourcing Co

FIFO inventory management method serves as a valuable tool for businesses seeking to maintain financial accuracy and minimise the risk of holding obsolete inventory.

By prioritising the sale or use of older items, FIFO ensures that the cost of goods sold aligns more closely with current market prices, resulting in more precise financial statements.

If you're looking to harness the power of FIFO inventory management for your business, Sourcing Co’s expert team is ready to assist you in optimising your strategy. We understand that every company has unique needs, and our professionals can tailor their guidance to suit your specific circumstances.

Get in touch

Whether you're a small business looking to streamline your operations or a larger enterprise seeking more accurate financial reporting, our experts are just a message or call away.

Reach out to us, and let Sourcing Co help you unlock the full potential of your inventory management practices, ultimately boosting your financial stability and operational efficiency.