Measuring the return on investment (ROI) in asset recovery is essential for surplus companies. Why? Because they need to understand how well they turn excess inventory into profit.
Surplus seems like an easy business to incur, but once you start noticing the challenges involved, you understand it takes time, experience, and resources.
For asset recovery ROI, using advanced valuation methods helps businesses accurately calculate the value of their surplus assets. As a result, they are able to make smarter decisions about buying, selling, and managing inventory.
In other words, they can maximize all opportunities and make the business work as a whole.
Of course, this is easier said than done.
Coastal Surplus Solutions has been working in the surplus industry for over a decade, and we can tell you that, indeed, it isn’t that simple.
However, asset recovery ROI and how the valuation method for your surplus inventory becomes easier as you go.
Before you dwell or jump deeper into the process, you just need to learn the basics.
What Is Asset Recovery ROI?
Asset recovery ROI shows how much money a company makes compared to what it spends on surplus inventory. In other industries, it works a bit differently, but the asset recovery is more on the surplus side.
For example, if a company buys a pallet of surplus goods for $8.000, pays $1.500 for shipping, and $1.000 for marketing, the ROI measures how much profit they earn after selling those goods.
Of course, the initial estimate is only that, an estimate. However, you will determine the ROI once you get all the details of the sales.
The question that follows is, how do you value this and work on the data?
Common Inventory Valuation Methods
Choosing the right valuation method affects how companies calculate costs and profits.
You have many options and the previous questions now show to be more difficult than you thought.
ROI requires proper follow-up and a good method that adapts to your business, inventory, and situation. Otherwise, the way you are calculating variables won’t be accurate.
Depending on the aspects of your surplus business, you can choose among the following:
- First-In, First-Out (FIFO)
FIFO assumes that the oldest inventory is sold first.
This method is common because it matches how many businesses sell products in order.
For example, if a company buys 10 laptops at $1.000 each and later 5 laptops at $1.100 each, the latter ones are not considering. Instead, selling 8 laptops means the cost of goods sold is based on the first 8 laptops purchased at $1.000 each.
Based on this basic explanation and how the method works, what makes people use it?
Two main reasons come to mind:
- Reflects the actual flow of goods.
- Useful when prices are rising, showing higher profits.
- Last-In, First-Out (LIFO)
LIFO assumes the newest inventory is sold first. This method can reduce taxable income during inflation by increasing the cost of goods sold.
An explanation allows you to understand it better. Imagine you are using the same laptops as the previous method. However, selling 8 laptops means the cost is based on the newest laptops first.
It is quite the opposite of the previous option and works better when you are focused more on:
- Lowering taxes when prices rise.
- Matching recent costs with current sales.
- Weighted Average Cost (WAC)
WAC calculates an average cost for all inventory items, smoothing out price changes. It is simple and practical when items are similar and prices don’t vary much.
Unlike the previous options, this one works more around a specific formula:
Weighted Average Cost = Cost of Opening Inventory + Cost of Purchases
Quantity of Opening Inventory + Quantity of Purchases
Thanks to this formula, many people find it better than adapting to other methods. Hence, the common reasons for choosing it include:
- Easy to calculate.
- Good for large volumes of similar products.
- Specific Identification
This method tracks the exact cost of each item sold and remaining in inventory. It is very accurate, but best for small businesses with unique or expensive items.
For large companies or inventories, it gets messy really quickly.
It Matters for Asset Recovery ROI
Do not underestimate how valuation methods matter.
They help you work properly with profits, losses, and financial statements. This keeps benefits clear and how you should be handling the entire business.
Each option adapts to specific concepts, like FIFO during inflation, or LIFO during lower profits.
Take the time to determine the best for you and reap out the benefits.
