FIFO vs LIFO: The Simple Way Businesses Manage Stock
- CSL Tasmania
- 22 hours ago
- 7 min read
Ever wondered how businesses decide which stock gets sold first? The answer often comes down to two methods: FIFO (First In, First Out) and LIFO (Last In, First Out).
These inventory management strategies don't just affect what leaves the warehouse; they also impact profit margins, tax reporting, and customer satisfaction.
In this guide, we’ll break down FIFO vs LIFO in simple terms, compare their strengths and weaknesses, and show you how the right choice can transform your supply chain, warehousing, and order fulfilment operations.
So, let’s get started!
What is FIFO (First In, First Out)?
The FIFO method, short for First In, First Out, is one of the most widely used strategies in inventory management. As the name suggests, it means that the oldest stock (the first items purchased or manufactured) is sold, shipped, or used before newer stock.
In practical terms, FIFO works just like rotating items in a supermarket. Products that arrive first are placed at the front of the shelf, ensuring they leave the warehouse before newer items. This keeps stock fresh and reduces the risk of holding outdated or expired goods.
Top 4 Advantages of FIFO
Now, let’s understand a few benefits of FIFO in inventory management.
Reduces waste and spoilage – Ideal for perishable goods such as food, beverages, and pharmaceuticals.
Accurate stock rotation – Ensures older products move before newer ones, which improves order fulfilment reliability.
Clearer accounting records – During times of inflation, FIFO often shows higher profits on paper, since older (cheaper) costs are matched against current revenues.
Easier to implement in logistics and warehousing – Especially with advanced warehouse management systems and dedicated storage facilities.
Potential Drawbacks of the First in First Out Approach
Higher taxes in inflationary periods – Because FIFO can show higher profits, businesses may face bigger tax obligations.
Not always ideal for non-perishable goods – For items that don’t expire, FIFO may not provide the same financial benefits as LIFO.
For businesses managing bulk freight into Tasmania, storing across multiple warehouses, and final-mile delivery, FIFO is often the safer choice. It aligns with industries that need to maintain freshness, traceability, and customer satisfaction.
What is LIFO (Last-In, First-Out)?
The LIFO method, short for Last In, First Out, takes the opposite approach to FIFO. Under this system, the newest stock purchased or manufactured is sold or used first, while older inventory remains in storage.
This method is less about the physical movement of stock (since in most warehouses, older goods naturally move first) and more about how inventory is valued on financial records.
Top Advantages of LIFO
Tax benefits during inflation: Because the most recent (and typically higher-priced) stock is recorded as sold first, it can lower taxable income by showing reduced profits.
Better cost matching: Aligns the cost of goods sold with current market prices, giving a more accurate reflection of profitability in industries facing fluctuating raw material costs.
Useful for non-perishable goods: Industries dealing with items that don’t expire, such as construction materials, metals, or bulk freight commodities, can benefit from LIFO.
Potential Drawbacks of the Last In First Out Approach
Not suitable for perishable items: Holding onto older stock increases the risk of waste and obsolescence.
Complex implementation in warehousing: In practice, stock doesn’t usually move this way, so systems and processes need to be carefully managed.
Restricted under accounting standards: In Australia, LIFO is not accepted under the Australian Accounting Standards Board (AASB), which follows International Financial Reporting Standards (IFRS). This limits its practical application for local businesses.
For Australian businesses, LIFO is mostly discussed from an accounting perspective, rather than a physical warehousing process. However, companies importing bulk goods or dealing with non-perishable items may still weigh their financial implications when considering global operations.
FIFO vs LIFO – Side-by-Side Comparison
While both FIFO and LIFO are designed to streamline inventory management, they take very different approaches. FIFO focuses on stock freshness and rotation, while LIFO leans heavily on financial strategy during times of inflation.
Here’s how they compare:
Real-World Examples
FIFO in action: A Tasmanian food distributor moves stock through its warehouse using FIFO to ensure freshness. Old stock is picked first, minimising waste and boosting customer satisfaction.
LIFO in action: A US-based mining company (outside Australia) may use LIFO accounting to better match rising commodity costs with current revenues, reducing taxable income.
For businesses managing bulk freight between Victoria and Tasmania, FIFO tends to align more closely with logistics best practices, keeping stock flowing naturally and ensuring older inventory isn’t left behind.
When Outside Logistics & Warehousing Change These Methods
Although FIFO and LIFO are often discussed as accounting methods, their true impact is most visible in the way goods move through the logistics chain. Once freight, warehousing, and delivery come into play, the practicality of each method becomes clearer.
The differences also extend into bulk freight and cross-docking operations. With large volumes of goods arriving by sea or road, FIFO provides a straightforward way to move stock efficiently through warehouses or directly into distribution.
Cross-docking, where products are transferred quickly from inbound freight to outbound delivery, is particularly suited to FIFO because it minimises handling and ensures older inventory doesn’t sit idle.
When it comes to order fulfilment and final mile delivery, FIFO again proves to be the more reliable option. Customers expect products that are in good condition, and shipping older stock first helps maintain trust while avoiding issues like expired or outdated goods reaching end-users.
Once a business adopts FIFO for reporting, it is generally required to apply it across reporting periods, ensuring comparability and avoiding manipulation of profits. Businesses using third-party logistics providers (3PL) or integrated warehousing systems should ensure their stock management practices are aligned with FIFO.
How to Choose Between FIFO & LIFO for Your Business
Deciding whether FIFO or LIFO is right for your business depends on several factors. While Australian regulations only allow FIFO for official reporting, it’s still helpful to consider the practical differences. Here are the main factors to weigh:
Type of Products – Perishable goods like food, pharmaceuticals, and beverages are best managed with FIFO to ensure freshness. Non-perishables may, in theory, benefit from LIFO, but it’s rarely practical in logistics.
Warehouse Operations – FIFO aligns naturally with stock movement in modern warehouses and distribution centres. LIFO often complicates storage and increases the risk of old inventory being left behind.
Accounting & Compliance – In Australia, FIFO is required under AASB and IFRS standards. LIFO is not permitted, making FIFO the only compliant option for local businesses.
Tax & Cash Flow – FIFO can result in higher reported profits during inflation, which may increase tax obligations, but it also provides transparency and consistency for financial reporting.
Business Growth & Logistics Scale – For companies managing freight and distribution between Tasmania and Victoria, FIFO is easier to implement across multiple warehouses and ensures smoother integration with order fulfilment and final mile delivery.
Taken together, these factors make FIFO not only the compliant choice but also the most practical and efficient method for Australian businesses.
Common Inventory Management Mistakes & How to Avoid Them
Even when businesses choose the right inventory method, mistakes in execution can erode the benefits. FIFO is simple in principle, but without the right systems and discipline, it can lead to inefficiencies and unnecessary costs. Here are some of the most common pitfalls—and how to avoid them:
1. Poor Stock Visibility
Without accurate, real-time tracking, businesses may lose sight of which products arrived first. This often results in newer stock being shipped ahead of older items, undermining the FIFO process. The solution is to invest in robust warehouse management systems (WMS) that track inventory down to pallet or item level.
2. Lack of Standardised Processes
If warehouse staff are not trained in consistent picking and storage practices, FIFO quickly breaks down. Clear operating procedures and regular audits are essential to keep stock rotation on track.
3. Over-Reliance on Manual Process
Manual logs or spreadsheets may work for small businesses, but they can’t handle the complexity of bulk freight, multiple warehouses, or high-volume order fulfilment. Partnering with an experienced 3PL provider can solve this challenge, since providers like Complete Storage & Logistics already have the technology, warehousing space, and staff expertise in place to manage FIFO at scale.
4. Ignoring Warehouse Layout
Inadequate racking and storage design can make it difficult to access older stock, leading to accidental “LIFO” operations. Warehouses should be designed to make FIFO the path of least resistance, with older products always positioned for easy access.
Conclusion
When it comes to stock management, the debate between FIFO and LIFO is global but in Australia, the choice is clear. FIFO not only meets accounting standards, but it also aligns naturally with the way goods flow through warehouses, freight networks, and delivery fleets.
For businesses shipping into Tasmania from Victoria, FIFO offers more than compliance it’s a way to keep operations efficient, customers satisfied, and inventory flowing smoothly.
At Complete Storage & Logistics, we make FIFO easy by managing every stage of the supply chain in-house, from bulk freight and warehousing to order fulfillment and final mile delivery. If your business is ready to simplify inventory management and strengthen distribution across Tasmania, we’re here to help.
Get in touch with Complete Storage & Logistics today and see how we can make your supply chain work smarter.
FAQs
1. How does FIFO impact cash flow in a growing business?
FIFO can improve cash flow predictability because selling older, lower-cost inventory first helps maintain consistent margins. This is particularly useful for businesses scaling across multiple warehouses or managing high-volume freight between Victoria and Tasmania.
2. Does FIFO help with seasonal inventory management?
Yes. FIFO ensures that stock purchased for specific seasons is sold in the intended order, reducing the risk of leftover seasonal goods becoming obsolete or requiring heavy discounting.
3. Can technology improve FIFO efficiency?
Absolutely. Automated picking systems, barcode scanning, and inventory tracking software make FIFO easier to implement at scale. These tools reduce human error and make it simpler to track stock movement across multiple warehouses or during cross-docking operations.
4. How does FIFO affect customer trust and brand reputation?
Using FIFO ensures customers receive fresh, high-quality products every time. Consistently delivering the right stock builds trust, reduces complaints, and strengthens a company’s reputation—especially for perishable or high-turnover items.
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