FIFO Management: A Guide for Businesses in 2025

Inventory Management is important to SMEs because it influences cash flows, minimizes waste, and operates seamlessly. FIFO (First In, First Out) is one of the most useful and common techniques among a plethora of possible approaches.  

With small and medium enterprises (SMEs) the right inventory management in SMEs can be the difference between success and simple survival. Good inventory management and warehouse processes directly impact your bottom line, customer satisfaction and business growth potential.

What is FIFO Management? 

FIFO or First-In-First-Out is a system of stock management in which the oldest inventory (first to arrive) is sold or consumed before new inventory. You can imagine it as a queue sorting out of your goods, the goods that reached you first are the first to leave your warehouse. 

Understanding FIFO from Two Perspectives 

The Accounting Perspective 

Financially, the FIFO approach means that cost of goods sold (COGS) is first charged with the oldest inventory costs. This will have a direct effect on your profit margins and balance sheet valuation. When your businesses use FIFO, your stock on hand represents the latest costs of purchase and thus your assets are more appropriately valued. 

The Operations Perspective 

In your warehouse, FIFO management functions as a stock rotation system. Your team systematically moves older inventory to the front, ensuring it gets picked and shipped before newer stock. This type of operation keeps the products from becoming stale in your shelves and also contributes to the maintenance of the best inventory turnover ratios. 

Benefits of FIFO for SMEs 

Financial Clarity and Accuracy 

FIFO offers a better profit computation and better financial reporting. Your balance sheet represents the true market value and it is thus easier to borrow or attract investors. This openness is particularly useful when it comes to audit and financial reviews.  

Significant Waste Reduction 

FIFO helps to reduce expired inventory or outdated inventory significantly by giving preference to older inventory. This benefit of FIFO directly enhances cash flow through the conversion of aging stock to revenue until it becomes useless. 

Seamless Compliance 

FIFO is compatible with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), so you can easily comply with your accounting standards. Such compliance minimizes audit problems and regulatory risks. 

Enhanced Customer Satisfaction 

Fresher and more up-to-date products are offered to customers, which results in an increase in satisfaction rates and brand loyalty. This advantage is especially important to companies that sell perishable products or technology products. 

Simple Adoption Process 

SMEs can apply the concept of FIFO in small steps, which will involve manual procedures and can be extended as the business expands. This is why FIFO is open even to companies with low initial capital. 

Challenges of FIFO for your businesses 

Inflation Impact 

In the periods of increased costs, FIFO records less COGS (older, cheap inventory costs) that leads to increasing the profits reported and the level of taxable income. This FIFO drawback may impose a tax shock on expanding companies. 

Complications of Manual Tracking  

Without proper systems, the process of tracking of the inventory is prone to errors and is time consuming. Spreadsheet errors, lost inventory and human factors can compromise the efficacy of FIFO management, particularly when your inventory numbers increase. 

Scaling Challenges 

Managing FIFO across multiple warehouses or handling thousands of products manually becomes increasingly difficult. Many SME challenges stem from outgrowing their initial manual systems without transitioning to automated solutions. 

FIFO in action among Singapore Businesses 

Retail and Supermarkets: In retail, grocery stores and supermarkets will have to rely on FIFO to avoid losses of expired food. When restocking, staff move the old products first. By doing this, up to 15-30% of waste can be saved as compared to random stock movement. 

Manufacturing Operations: Manufacturers use FIFO to consume raw materials in the order received, maintaining consistent product quality. A furniture manufacturer, for example, uses lumber batches sequentially to ensure consistent wood grain and moisture content across products. 

E-commerce Fulfilment: Online retailers use FIFO management in their fulfillment centres to prevent the build-up of dead stock. Warehouse management systems (WMS) also direct picking activities to allow older stock to ship before new ones come in. 

FIFO and ERP Systems: Smarter Inventory Management 

ERP Automation Advantages: Modern ERP inventory management systems ensure automatic FIFO compliance through sophisticated lot and batch tracking capabilities. These systems generate real-time stock tracking reports and eliminate manual calculation errors that plague spreadsheet-based approaches. 

Multi-Warehouse Coordination: For scaling SMEs operating multiple locations, ERP systems provide centralized visibility across all warehouses. You can track FIFO compliance, transfer aging stock between locations, and optimize overall inventory distribution. 

Automated Picking Lists: ERP systems generate picking lists that automatically follow FIFO rules. Warehouse staff simply follow system-generated tasks, ensuring consistent compliance without requiring constant supervision or specialized knowledge. 

Quick FAQs About FIFO Management

1. What is FIFO in inventory management?: FIFO (First-In, First-Out) is a method where the oldest inventory gets sold or used before newer stock, ensuring proper stock rotation and reducing waste. 
2. Why is FIFO important for small businesses?: FIFO helps SMEs reduce waste, improve cash flow, maintain compliance with accounting standards, and enhance customer satisfaction through fresher products. 
3. What are the disadvantages of FIFO?: Main disadvantages include higher taxable income during inflation, complexity of manual tracking, and scaling challenges as businesses grow. 
4. How does ERP software support FIFO?: ERP systems automate FIFO compliance through batch tracking, generate proper picking sequences, provide real-time inventory visibility, and eliminate manual tracking errors. 

Read more: All-in-One Guide to Inventory Management in Singapore

Conclusion 

FIFO is a simple but very effective inventory management technique that can revolutionise the operations of any SME. Although a manual implementation is practical with smaller operations, a business with growth to look forward to needs to consider ERP automation to ensure scale compliance with FIFO. 

The secret to FIFO success is that you must begin with a good foundation in place proper warehouse organization, staff training and consistent processes and then as your business expands you need to add an appropriate technology. 

Looking forward to know how the ERP software can be used to integrate your FIFO operations and remove human errors in manual tracking? Learn about how Synergix ERP solutions can streamline your inventory to facilitate business growth. 

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