Can I change the inventory method each accounting period?

Maintaining inventory for your products allows you to satisfy demand immediately rather than reacting to orders as they come. But, when you keep an inventory, you must manage it as part of your small business accounting. 

Inventory management is more than a required practice. It also helps you assess product demand to estimate future sales. Well-managed inventories increase your business’s cash flow to help working capital. Plus, it enables you to reduce overall production costs as you can order only the necessary stock and buy in bulk. 

Choosing the proper inventory accounting method will help you get the most out of it. But if you’re wondering when you can change your inventory method, you might want to consider whether it’s a good idea. 

This guide will discuss changing inventory methods for your business, including:

• Can a company change its inventory method each accounting period? 
• When should a company change its inventory method?
• How can a company smoothly transition to a new inventory method? 

If you want to change your company’s inventory method, you need to wait until the end of the accounting period, which is usually a calendar year. But can a company change its inventory method each accounting period? In short, no. Switching inventory methods continuously actually breaches the accounting principles of consistency. 

Though you may change your accounting method at the end of an accounting period, you can’t do it each accounting period. Still, it may not be a good idea if it were possible.  

Aside from violating principles, changing your inventory management method frequently will make it more difficult to keep up with and maintain your records. Tracking your inventory well helps you understand your business performance and monitor growth over time. Switching methods makes it challenging to get a complete picture of your inventory. 

Also, switching your inventory method could lead to slips and mistakes. You could accidentally revert to the other approach or leave a gap in your records. Errors could lead to reporting inaccuracies and financial repercussions. 

Once you understand that a company can’t change its inventory method each accounting period, you may wonder when you should. When it comes down to it, only change your inventory method when you need to. You might have grown or pivoted your business and need to reconsider inventory management. With that said, change this method as infrequently as possible. 

Some reasons for changing your inventory method include: 

• Experiencing a drastic change of inventory 
• Expanding your company rapidly
• Realising your current method isn’t working well 

There are a few key inventory methods, and each is suited for specific business needs. Some are more straightforward, while others can manage more complicated inventory. For example, if you create products and source the materials, your inventory is more complex than a company that purchases pre-made products wholesale. 

If you feel you need to change your current method, here’s a brief introduction to some of the main inventory methods, and when you might use them:

• First in, first out (FIFO): Considers the first item bought, the first one sold. It’s easier when you have large amounts of the same item in inventory, and the prices of bulk shipments vary. 
• Last in, first out (LIFO): The opposite of FIFO, this method treats that last item bought as the first one sold, which is a less common method restricted in some cases.
• Weighted average: This method pools your product costs together and averages them out, taking sales earnings out of that average. It’s easier to manage and best if your product prices rarely vary.
• Specific identification: Assigns a particular cost to each item you sell, best suited for small businesses. It can help establish accurate income statements but is more challenging to manage as inventory grows. 

If you decide you need to change your inventory method to improve or adjust your business, there are a few ways to make that transition smoothly. First, digitise your inventory records and save the previous records before switching methods. Storing this is important since the HMRC expects you to maintain financial records for about six years. It’ll be much easier to keep and refer to them if you have a digital copy. 

As you set up the new method, structure it clearly with organised documents. Make sure you note where and when you switched methods. Outline your new approach and create a plan for how you’ll update and calculate it day-to-day. Start by adding all inventory you currently have so you can pick where you left off, but be sure to avoid confusing duplications. 

Next, once you choose the method that best suits your business, look for an inventory management tool that can automate and simplify the process. Consider all software options to determine which setup and features are right for your business. Some tools you may consider using include Oracle’s Netsuite, InFlow, or Orderhive. 

Whether you continue with your inventory method or switch to a new one, be sure to check over your numbers regularly to promote accuracy. Try to organise yourself well, set aside time once a week and at the end of the quarter to look over your inventory data. These checks allow you to catch any issues while assessing your business performance. 

Aside from maintaining your inventory records, you’ll need strong financial organisation for your business. But, financial management can be stressful and time-consuming when you run a business. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like cash flow insights, you can confidently keep on top of what you spend and earn for your business wherever you are. This feature will help you assess how your inventory management supports your cash flow, and how you can improve it. 

Start your three-month free trial today. 

Find out more here.