Did you know understating your inventory understates income (and vice versa)? If you carry inventory, managing it is no easy task. In fact, I’m amazed how many businesses still rely on the old fashioned “counting” method. Quick Accounting 101 on this. If you understate your inventory, you have more on hand than what your books show. Or, you wrote off inventory that’s still sitting in your warehouse. Put that unrecorded inventory back on your books and income goes up. It’s the opposite when you overstate inventory. You’ll have to write it down to the correct level. Inventory should be recorded at cost.
This can move your income a lot in either direction if you get it messed up. Let’s say you didn’t update your inventory since the prior year and it showed on your books at $100,000. You forgot to count it and sent in your tax return and bank financial statements. It was $150,000 after the count – short by $50,000 or 50 percent! That also means you understated your income to the IRS and the bank by $50,000 too. That’s double bad but don’t bury your head in the sand. We all make mistakes. Get it corrected and amend the tax returns and financial statements. More importantly, start checking into real-time inventory management systems that will keep you on track.
There’s another domino here. This will also impact the value of your business. $50,000, reduced by taxes of 30%, and divided by an estimated 16% rate of return is over $200,000 of “lost” value. Wow, better get this right going forward–especially if you’re buying, selling, or involved in divorce or litigation. Losing $200K is a really bad day.
If you’re struggling with this, hit me back with a message. There’s nothing to be embarrassed about since others are too.
Can I Help You?
Hi, I’m Josh Horn, CPA/ABV, CVA of Horn Valuation. I help with business valuations in friendly or unfriendly situations. I also help owners build valuable companies. My clients are business owners and attorneys. If you’d like more information, check out my website hornvaluation.com, email me at email@example.com, or call me at 217-649-8794.
I’m a licensed Certified Public Accountant (CPA) and double-credentialed in business valuation (CVA & ABV). I’ve been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. I’ve also valued and been the primary advisor to multi-million dollar and small companies in various industries.
“If you’re not working on business value, who is?” Josh Horn, CPA, Certified Valuation Analyst and Accredited in Business Valuation