What is FIFO? Meaning simply explained with practical examples and comparison with FILO

The FIFO principle, short for "First In, First Out", is one of the most common methods of warehouse management and inventory control. It ensures that the products stored first are also sold or used first.

In this article, we explain the meaning of the FIFO principle in detail and show how it differs from the FILO principle. We will discuss the advantages and show you practical examples of how the FIFO principle is applied in various industries. Let's go!

Both the FIFO and FILO methods offer different advantages and disadvantages, depending on the type of products and the company's objectives. Each company should therefore decide for itself which method of warehouse and inventory management is best.

Advantages of the FIFO method:

• Minimises losses: older stock is sold first, reducing the risk of expiry and associated financial losses.
• Ensures product quality: Particularly important for perishable goods and products with expiry dates in order to always offer fresh products.
• Better stock overview: Easier stock management as the oldest items are removed first.

Disadvantages of the FIFO method:

• Greater storage effort: warehouse must be organised so that older products are easily accessible, which can mean more effort in large warehouses.
• Not as suitable for increasing value: products that increase in value over time may not be optimally utilised.

Advantages of the FILO process:

• Efficient use of storage space: newer items can be stored at the top or front, saving space and handling time as less organisation is required.
• Focus on new products: New and on-trend products are sold first, which is advantageous when trends change quickly.
• Easier to add value: Particularly useful for products that increase in value or whose demand increases over time.

Disadvantages of the FILO process:

• Risk of loss of quality: older stock could expire or lose value as it stays in the warehouse longer.
• More complicated stock management: It requires close management to ensure that older stock is not overlooked or forgotten

  
The FIFO method (First In, First Out) states that the products that are stocked first are also sold first. This means that the cost of goods sold (COGS) is based on the acquisition cost of the items purchased first, while the selling price is determined by market conditions.

Which speaks in favour of the FIFO method:

• Complies with Generally Accepted Accounting Principles (GAAP): FIFO is one of the inventory valuation methods permitted by GAAP. GAAP defines how companies should prepare and present their financial reports.
• Better inventory management: The FIFO method ensures that older inventory is sold first, minimising the risk of expiration or damage.
• Greater transparency: the FIFO method provides better visibility of inventory costs as the older and usually cheaper stock is written off first.

But:

• Can lead to profit fluctuations: When prices rise, profits can be artificially increased by selling inventory with low acquisition costs. Conversely, when prices fall, profits can fall.
• Can increase inventory costs: There is a risk that older, possibly less saleable products may have to be stored for longer, which can lead to additional storage costs.

FILO: First In, Last Out

The FILO method, also known as "First In, Last Out", states that the products that are stocked first are sold last. This means that the cost of goods sold is based on the most recent acquisition cost, but the selling price is still determined by the market.

What speaks in favour of the FILO process:

• Can compensate for fluctuations: The FILO method can help stabilise profits by reducing the impact of product price fluctuations. Since the newest and most expensive inventory is sold first, the COGS reflects the current market price, which reduces fluctuations in profits.
• Can reduce storage costs: As older stock remains in the warehouse for longer, this could be beneficial for products with very stable or value-adding characteristics. In such cases, it makes sense to sell the newer stock first.

But:

• Not compliant with GAAP: The FILO method is not permitted under generally accepted accounting principles (GAAP). This can lead to accounting and reporting issues, especially for publicly traded companies.
• Poorer inventory management: The FILO method can result in older products remaining in inventory longer, increasing the risk that these products will expire or be damaged before they are sold.
• Less transparency: FILO offers less transparency in terms of actual inventory costs, as the older and possibly cheaper stock is only booked out later. This can distort the true costs.