FIFO (first in, first out) is the standard inventory method for beverage distribution. Products have expiration dates, so your physical inventory flow already follows FIFO in practice. Using the same method for accounting keeps your books aligned with how inventory actually moves through your warehouse.

With FIFO, the oldest inventory costs hit your cost of goods sold first. When supplier prices increase over time, this means lower COGS and higher gross margins on paper. The flip side is higher taxable income. For beverage distributors dealing with consistent price increases from suppliers, this tax impact is worth discussing with your accountant during planning conversations.

Weighted average cost is an alternative that some high-volume distributors use. Instead of tracking specific costs for each purchase, you calculate an average cost across all units. This smooths out price fluctuations and simplifies calculations when you’re moving large quantities of similar products. The tradeoff is less precision in understanding margins on specific product lines or suppliers.

LIFO (last in, first out) rarely makes sense for beverage distribution. While it can provide tax advantages during inflationary periods, it doesn’t match how perishable inventory actually moves. Using LIFO for financial statements while physically rotating stock on a FIFO basis creates a disconnect that complicates inventory management and audits.

Beyond the costing method, beverage distributors need lot tracking capabilities. Recall situations require knowing exactly which customers received products from specific batches. Your inventory system should track lot numbers and expiration dates regardless of which cost flow method you choose. Wholesale and distribution businesses often underestimate this requirement until a recall happens and they’re scrambling to identify affected shipments.

Spoilage and breakage need consistent treatment too. Establish a process for writing off damaged or expired inventory and make sure it flows correctly through your cost of goods sold. Random write-offs without documentation create problems at year-end and during audits.

The inventory method you select gets locked in once you start using it. Changing methods later requires IRS approval and restating prior periods. Getting this right from the start matters more than most distributors realize. A Boca Raton fractional CFO familiar with distribution operations can help you evaluate which method fits your specific situation before you commit to an approach that doesn’t serve your business well long-term.