1. About
There are different ways to set up and track inventory and cost of goods sold (COGS) in Finaloop. There isn’t a one size fits all method and selecting the right method is an important step in creating an inventory management process that really works for you.
During the trial period we ask you to select an inventory method for COGS. You’re not ‘married’ to a specific method, and it can always be changed for any year with open books.
If you’re not sure which method is best for your business, then read on! We recommend you also check out this video on choosing your Finaloop COGS method.
2. Why you need an inventory method
Let’s start with the basics.
There are different ways of calculating inventory costs (stock) you hold, and the costs of the inventory you sell, or your COGS.
The method you select, tells us how we should be recording your COGS in your P&L and your inventory in your balance sheet.
Having this control and visibility help you better manage these costs, optimize gross profit, and fine tune your pricing.
Whichever way you look at it, you have to decide on how inventory is calculated and reported in your books.
3. COGS method options
In Finaloop, you can track your COGS using one of three methods.
Who is it best for? | Purchase-based | Sales-based | InventoryIQ |
Inventory models |
|
|
|
Landed cost visibility | N/A | Has landed costs through an IMS, WMS, or ERP | Has no landed cost or incorrect landed cost visibility |
Purchase-based
Using purchase based COGS, we record your cogs at the time you purchase inventory, unrelated to when you actually sell your products.
Purchase-based works best for brands that hold little inventory, usually below $3,000.
It also works best for dropshippers when vendor bills are paid on or very close to the date of the bill.
At year-end, Finaloop adjusts your inventory balance to reflect your actual inventory and COGS, ensuring your books remain tax-ready.
Sales-based
Using sales based, your inventory purchases are recorded as inventory in your Balance Sheet and COGS are calculated when you sell inventory based on a cost per unit or cogs you provide to us.
It allows you to connect your COGS with your actual sales data, but requires you to calculate your own landed costs per SKU.
This method is great for brands with more than $3,000 on average in inventory value each month who already have a strong set up to calculate their landed costs, for example in an inventory management system (IMS), a warehouse management system, or an ERP.
It also works best for dropshippers who have payment terms with their vendors and don't pay the bill upon receipt.
If you currently use spreadsheets to calculate your landed cost, we recommend using InventoryIQ instead.
InventoryIQ
InventoryIQ is a real-time inventory management system that automatically calculates your landed costs based on your purchase orders and tracks your inventory and COGS on a unit-by-unit basis using the FIFO method.
It includes PO creation, automated landed cost calculation, real-time broken-down COGS, warehouse stock tracking, recipes (bill of materials) & assemblies, inventory vendors balance, and more.
With InventoryIQ, COGS are recorded when you sell your products and we track your shipments, transfers, and receipts as well.
This method is great for brands with more than $3,000 in average inventory value each month who are looking for a more robust way to track their cost per unit, manage their POs, and view their stock unit levels directly in Finaloop.
4. Features and benefits of each method
There are no hard and fast rules that determine which inventory method you use, but here are the features of each method.
Feature / Benefit | Purchase based
| Sales based
| Unit based (InventoryIQ) |
Real-time COGS calculation |
| ✔ | ✔ |
Automated landed cost calculation |
|
| ✔ |
More accurate reflection of gross profit and insights re pricing |
| ✔ | ✔+ |
Tracking of on-hand units per SKU |
|
| ✔ |
Purchase orders (POs) |
|
| ✔ |
Bill of materials / recipes |
|
| ✔ |
Multiple warehouse tracking |
|
| ✔ |
Shipments and receipt syncing |
|
| ✔ |
Working with external IMS, WMS, |
| ✔ |
|
5. The impact on cash or accrual accounts
All COGS methods can apply for cash or accrual basis taxpayers. However, based on the IRS tax rules, COGS are reported on an accrual basis for both cash and accrual taxpayers, unless you have an IRS tax exemption for small businesses.
In other words, even if you select the purchase based method, we’ll make an adjustment at year end to ensure your COGS are not overstated for tax purposes, in line with the accrual rules.
For more about the exemption, see the section ‘Exception for small business taxpayers’ in the article Everything you need to know about purchase-based COGS.
6. Select your COGS method
To select your COGS method:
Navigate to Inventory>Settings>General.
In the My COGS tracking method, select the relevant method.
If this is not your first year in Finaloop, you'll have the option to apply different methods to different years. For example, if your 2023 books are sales based but you want to move your 2024 books to unit based with InventoryIQ, move the toggle and select the applicable methods from the dropdown.
Click Save.
7. Change your COGS method
Generally, you can only choose one tracking method for each year (to avoid major accounting and tax issues). But, you can always decide to change a tracking method for different years if your initial choice no longer fits your needs.
If you have any other questions, or are still not sure which method makes the most sense for you, contact us at [email protected], we're happy to help!