FIFO ("first in, first out") and LIFO ("last in, first out") are two ways of accounting for which units of inventory you consider sold first. They're both legitimate; they produce different cost-of-goods-sold numbers, which produces different tax bills. They also imply different things at the warehouse — FIFO usually means physical rotation, while LIFO is mostly an accounting choice. This piece covers when each makes sense for an ecommerce brand and which decisions are actually warehouse-driven vs. CFO-driven.
How FIFO and LIFO actually work
FIFO assumes the first units in are the first units sold. LIFO assumes the opposite — newest units sold first. The pick is an accounting election, not a warehouse rule, but in practice FIFO usually does drive physical rotation (especially for anything with a shelf life), while LIFO is mostly a tax-and-COGS choice. The rest of this piece walks through what each one does to your numbers, when each is legal, and what your warehouse has to actually do to support either.
LIFO Method: A Primer
The LIFO inventory method assumes that the most recently acquired items are sold first. Since newer units likely have higher costs in inflationary environments, LIFO reduces taxable income compared to FIFO.
Key Benefits of LIFO
- Lowers taxable income in inflationary periods
- Results in higher cash flow
- Keeps latest inventory on hand
Potential Drawbacks
- May conflict with international accounting standards
- Requires more record-keeping than FIFO
- Oldest inventory units remain unsold
FIFO Method: A Primer
The FIFO inventory method assumes the oldest inventory units are sold first, aligning with many products' natural flow. FIFO matches revenue against oldest costs for increased taxable income in inflation.
Key Benefits of FIFO
- Complies with international accounting standards
- Simpler record-keeping needs than LIFO
- Better matches costs against revenues
Potential Drawbacks
- Results in higher taxable income than LIFO
- Oldest inventory could expire before selling
- Lower cash flow than LIFO in inflation
Running FIFO in the warehouse
FIFO is an accounting election, but for anything with a shelf life it's also a physical job: the oldest unit of a SKU has to ship before a newer one. Three things have to line up for that rotation to hold.
- Your warehouse system tracks arrival date per lot, so every unit knows how old it is.
- Pick rules sort oldest-lot-first, so a picker pulls the oldest stock without thinking about it.
- Someone audits a sample of bins each cycle to catch lots that drifted out of order.
Keeping FIFO honest at peak
High-volume periods are where rotation slips. When orders surge, pickers reach for whatever's closest instead of whatever's oldest. Two things keep FIFO flowing under load: a layout that puts older stock in the easier-to-reach pick face, and pick software that enforces the oldest-lot rule instead of leaving it to judgment.
Choosing the Best Method
There's no universally "best" inventory method. The optimum approach depends on your business's specific needs and goals. However, understanding the pros and cons of LIFO and FIFO allows an informed decision.
Most ecommerce brands don't run their own warehouse, so the accounting choice stays with your books while the physical rotation falls to whoever ships your orders. If you'd rather hand off oldest-lot-first rotation entirely, talk to us.