It’s often said that two of life’s certainties are death and taxes. What’s said less often – but is just as certain – is that your tax liabilities can be the death of your business.
You work hard to create profits so you can re-invest those profits into inventory to build your business. Then, when the time comes to pay the IRS, you have no cash because it’s all tied up in your inventory.
The last time I checked, the IRS didn’t accept Victorian rockers or Depression glass as payment for tax liabilities; they actually wanted cash. To make sure that you have enough cash when tax time comes, you need to get a good handle on your inventory.
For non-accountants, here’s a look at how inventory and taxes are related (to keep it simple, let’s assume that there were no returns and that no inventory purchases were made): Net Sales minus Cost of Goods Sold equals Gross Profit.
There are several ways of calculating the cost of the goods you sell, but the most commonly used is to subtract your inventory on hand at the end of an accounting period from your inventory on hand at the beginning of an accounting period. Missing from the ending inventory will be the items you have sold plus items that were stolen, misplaced, not counted, given away or otherwise unaccounted for. If you miss counting $5,000 worth of inventory (for example, a packed show trailer that you missed) then your Cost of Goods Sold will be $5,000 too high and your profit $5,000 too low. You will have understated your profits and underpaid your taxes. The amount of cash you have in the bank will seem disproportionately high to the profit you are showing and you may think that you are flush with cash.
If you are like many retailers, you’ll spend the “extra” cash. When you account for the “missing” inventory the following month, you won’t have the cash to catch up on the extra tax liability.
To avoid overpaying or underpaying your taxes, you need to control and track your inventory. The first step to controlling your inventory is to know exactly what information you need to track to create maximum sales and profits with minimum tax liability. Inventory tracking is what we’re going to investigate here today.
A good inventory system is more than just a list of what items you have and how much you paid for them. An adequate tracking system will allow you to do the following:
- “Take inventory” quickly and easily: If you have a large inventory, counting everything can be time consuming. An inventory system that utilizes a bar code scanner is a great time saver. There are barcode-reading scanners available such as KwikCountEX that are relatively inexpensive and download their information directly to your Excel spreadsheets.
- Craft better tags: Turn your price tags into a silent sales force.
- Know the location of every item: If you have only one retail location, this isn’t a big issue. But, if you have multiple retail locations, a warehouse and keep trucks and trailers loaded for shows, then your inventory program should show you where everything is located so that it can be counted when you take inventory.
- Inventory turnover by category: This will tell you at a glance what kinds of items are selling briskly so you can keep these items stocked. Also, you will be able to identify items that took a long time to sell. If it took you three years to sell a widget, that should be a clear sign that you shouldn’t stock any more widgets.
- Aging of specific items or categories: With this point, we get back to the tax issue.
According to GAAP (generally accepted accounting principles) inventory can be valued at the lower of cost or market value. For example, if you have a store full of Victorian or mahogany furniture that you’ve had for several years, you’re only hurting yourself by keeping it on your books at the price you paid for it. Clearly, the market has dropped for these items and in many instances they may not be worth what you paid. If this is the case, the items should be marked down.
Doing so will have both a positive and a negative effect: Your cost of goods sold will rise and your profits will go down, but because your profits are lower, your taxes will be lower (see your accountant for details). The net result of this move is that you will have more cash in your pocket. You can still sell the furniture for your original retail price (if you can get it) and you’ll re-capture the markdown when the item is sold. In the meantime, you’ll pay less taxes.
Although specialty inventory software programs are available, I’ve found that the most flexible software for keeping track of inventory is Microsoft Excel. Excel is widely supported, can be customized, is expandable, and uploads easily to eBay and e-stores.
If you keep your books and business plan on Excel spreadsheets, your Excel inventory sheets can be linked directly to them, as well.
Here’s a list of basic column headings for an Excel inventory worksheet. Add more as needed, but start by using these; doing so will help you to stay profitable and keep your tax liabilities under control.
- Inventory Number (so you can differentiate similar items). Consider coding your price flexibility into your inventory number for easier negotiating: Date In, Item, Location, Description. Read more: Behind the Gavel: How to get search engines to notice your antiques inventory descriptions
- Provenance (see “crafting better tags, above), Condition, Category (eBay lists 22 categories of antiques; I recommend that you use those for easier online selling), Sold Date, Sold Location, Payment Form (credit card, PayPal, cash), Photos.
- Over time, you will determine what information you need to know to run your business effectively. Columns can be added as you need them. I prefer Excel because I can change it as my needs change rather than shop for new accounting software every two years.
Lastly, a disclaimer: I’m not a certified public accountant. If you have accounting or tax questions, discuss your specific situation with an accountant. All I have done here is share my experience (and many others have had the same experience).
Now a rejoinder: Don’t let your accountant run your business. Accountants can supply you with financial tools but it’s up to you to use the tools as you see fit.
Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. Learn more at his website http://www.waynejordanauctions.com, at 276-730-5197 or firstname.lastname@example.org.
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