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Retail Inventory Method | Smart Warehousing
Smart WarehousingMar 18, 2024 11:36:00 AM4 min read

What is the Retail Inventory Method and How to Calculate It

Inventory is an integral part of any business, but what happens when performing physical counts becomes the most time-consuming aspect of your business? It might be a little outdated to say “time is money,” but there’s truth in this statement. And when an old slogan becomes reality, it’s time to rethink how you’re managing inventory.

The RIM, also known as the “retail inventory method,” is a convenient strategy for estimating the value of your business’s inventory within a specific timeframe. It’s a simple calculation that offers a quick, effective alternative to the time-consuming burden of conducting a physical inventory count. The calculation-based retail inventory method allows businesses to perform fast assessments, implement improvements, and ensure their logistics run like a well-oiled machine.


The Importance of the Retail Inventory Method

Most retail businesses have a large chunk of capital tied up in inventory, meaning effective inventory management is paramount for success. Making informed decisions regarding stock ordering or product expansion is difficult if you’re not adequately overseeing your inventory. By weaving the retail inventory method into your strategy, you’ll optimize your supply chain and remove costly headaches from spiraling out of control.

The retail inventory method calculates inventory value by comparing the cost of the goods to their retail prices, using a cost-to-retail ratio. It’s important to note that the retail inventory method may not deliver absolute precision, but it offers a swift and simple way to assess your inventory. While RIM won’t replace physical counts, it will serve as a valuable addition to your inventory management strategy. 

By employing the retail inventory method, businesses can gain insights into their inventory levels without the need for time-consuming physical counts. Instead of meticulously counting each item, RIM allows for a calculation-based approach, significantly reducing the time and resources required for inventory assessments. This efficiency is particularly beneficial for businesses with large and diverse inventories and those operating in fast-paced retail environments where timely decisions are pivotal.


Performing the Retail Inventory Method

Now we’ve arrived at the fun part: using a little bit of math. After all, this is a calculation process! The retail inventory method may be a few extra steps, but it’s promised to be a welcomed addition to your inventory management strategy.

Here's how to perform the retail inventory method calculation:

  • Determine the cost-to-retail ratio by dividing the cost by the retail price and multiplying by 100 to get a percentage.
  • Calculate the total cost of goods available for sale by adding the beginning inventory cost to the cost of purchases.
  • Compute the cost of sales by multiplying total sales by the cost-to-retail ratio.
  • Finally, calculate the ending inventory by subtracting the cost of sales from the cost of goods available for sale.

To better understand the retail inventory method, let’s imagine the following scenario. Let’s say a beauty brand is selling eye serum for $25 a tube, while purchasing each tube for $5, translating to a cost-to-retail ratio of 20%.

Here are a few details to consider:

  • Beginning at-cost inventory: $5,000 (1,000 units)
  • Additional inventory purchased: $2,500 (500 units)
  • Total inventory available for sale: $7,500 (1,500 units)
  • Sales during the period: $10,000 (400 units sold)

Let’s calculate the ending inventory cost using the retail inventory method:

Beginning at-cost inventory + Cost of additional purchases - Cost of sales = Ending inventory cost: ($5,000 + $2,500) - $2,000 = $5,500

With this calculation, we can determine the ending inventory cost to be $5,500. By dividing the ending inventory cost ($5,500) by the cost per unit of eye serum ($5), we can estimate that 1,100 bottles are remaining out of the total 1,500 units purchased during the month.

Retail Inventory Method Advantages

Believe it or not, the retail inventory method isn’t a novel concept. It was invented by Malcolm McNair, a Harvard Business School professor, in the early 1900s. His overarching goals for devising this method still ring true today:

  • Simplifies inventory counts.
  • Practical for every retailer regardless of the business’s size.
  • Reduces time and labor costs.


Retail Inventory Method Disadvantages

Of course, as with anything, there are some disadvantages to the retail inventory method. The RIM offers retailers time savings and simplicity, but it’s reliant on assumptions. There are variables, such as consistent markups, that can lead to inaccuracies. It should also be noted that it doesn’t eliminate the need for periodic physical inventory counts.


Inventory Management, Reimagined

Staying competitive and building a thriving business requires a strong, efficient inventory management strategy. From inventory visibility to stock replenishment, effectively managing inventory can minimize revenue loss, optimize order fulfillment, and deliver a better customer experience. 

At Smart Warehousing, we create personalized logistics solutions to help move businesses forward. From warehousing and order fulfillment to transportation and return management, we can help you streamline operations and maximize profitability. To learn more about our technology and solutions, contact our team today.