Why Would Inventory Value Increase?

Article written by EricBank

It seems like only awful things can happen to inventory: it breaks, spoils, gets stolen or goes obsolete. Accountants are used to marking down inventory value, but it's rather a rare accounting entry that actually increases the value of inventory. In fact, this is only possible to do this if you use international accounting standards, because GAAP doesn't allow for it.

Inventory Valuation

GAAP requires that when your inventory becomes distressed in some way, you write down the value using LCM: lower of cost or market method. Under LCM, the markdown is required when inventory cost is greater than its market price. The markdown must lower the value to no more than its net realizable value -- the amount that the inventory will garner at auction after subtracting the extra costs necessary to prepare and sell the goods. The minimum value of the inventory is the net realizable value less your regular profit margin.

Write-Downs

GAAP is fussy when it comes to writing down inventory value. Specifically, the rules request you use the allowance method. Under this method, you must estimate the value of the inventory losses you anticipate in the next accounting period. At the start of the period, debit cost of goods sold and credit reserve for lost inventory by the amount of the estimated loss. By recognizing the loss at the beginning of the period, you meet the requirements of the matching principle: book expenses in the period that is responsible for causing them. This handles the case where you don't discover inventory damage or theft until a later period. Otherwise, you'd be booking the expense in an incorrect period. Eventually, you'll discover the theft or damage, at which point you debt the reserve account and credit inventory for the loss amount.

Income

The cost of goods sold increases when you write down inventory. An increase in COGS reduces in gross profit, which is equal to sales revenue minus COGS. Of course, this decreases your taxable income, your tax bill and your net income. This is usually considered a desirable outcome. However, if a company uses employee incentives in an effort to maximize income, and an increase in COGS is the last thing the company wants. "Income management" techniques attempt to minimize COGS and maximize net profit. This creates the temptation to ignore distressed inventory. Shocking but true. It also just might be fraudulent.

Recovery

The written-down inventory can occasionally regain value. Imagine that a consumer safety scare causes a drug producer's inventory value to plummet. However, if the scare proves to be unfounded, the inventory value can experience a price recovery. GAAP forbids you from increasing the value of the inventory, whether or not you've marked it down. International financial reporting standards take the opposite approach: you have to mark up inventory that you wrote down when the price recovers, but only as much as the written-down amount. As more and more U.S. companies begin adopting IFRS, the opportunity to mark-up inventory will spread.

Four Tips for Small Business Recruiting

Article written by EricBank

Ask any hiring manager and they'll tell you how hard it is to find top talent. On the surface, this might seem a little puzzling, since currently 5.6 percent of the U.S. work force is unemployed and actively looking for a job. Experts recognize the paradox -- even though there are plenty of job hunters, companies struggle to find and keep the talent they require.

The Challenge

The problem is magnified for small business recruiters, who are competing with mammoth companies like Apple that provide goodies like free meals, on-site medical care, sports facilities, sponsored junkets and free high-tech goodies. Perhaps that's why three out of five managers and owners of small businesses complain that their biggest challenge is finding the right workers.

Nonetheless, some experts have arrived at a startling piece of advice for small businesses contending with recruiting issues: Choose not to compete!

Face reality. Anyone who is looking for the benefits and safety of a mega company is probably never going to be satisfied working at a small business. A better tactic is to appeal to folks with an entrepreneurial spirit and enjoy working at a small venture.

Outsmart the Competition

Here are four steps a business owner can take to outfox competing recruiters:

1. Let recruiting be driven by members of your team

Your loyal employees have a vested interest in growing your company. Ask them for referrals, because if they are top performers, they probably know other talented people who would fit well into your organization. Look at it this way -- they love their workplace and do not want to recruit employees who will pollute the environment.

2. Emphasize the point that your business has a huge potential to grow

Your company offers a lot, even if it is small. Think of the important advantages you provide: you aren't regimented, inflexible or stagnant. That means you offer the perfect opportunity for talented employees to advance as your business grows. Many top performers face the nightmare of devoting several years to a company without accomplishing anything of note. Your selling point is that talented employees will have a major impact on the company.

3. Offer recruits the opportunity for professional growth

Really good performers aren't satisfied with baubles like cut-rate phones and a basketball court. What they really want is to increase their expertise and make valuable contributions. Collect and relate stories of how individuals within your organization have had the opportunity to boost their knowledge and skills. Entice free-thinkers by explaining that you don't straitjacket your workers, you enable them.

4. Never stop recruiting

The competition for top talent never ends, and small businesses should never settle for second-best. Rather, it's important for entrepreneurs to persistently hunt for high-value performers who completely buy into your company's goals and ethos. Ask all your team members to join the recruiting effort and emphasize you commitment to long-term relationships. Even if a prospective employee is not a perfect match at present, you may find a few years down the road that the candidate has exactly the skills you need.

ESOPs for Small Corporations

Article written by EricBank

If you run a small or closely held corporation, you can compensate employees just like the big boys do by setting up an employee stock ownership plan. This is a great way to build employee loyalty without indulging in expensive cash bonuses or raises. An ESOP is one of several ways for employees to receive stock shares from their employers. Other methods include stock options, bonuses, direct purchase and profit-sharing plans. As of 2014, about 7,000 U.S. companies sponsored ESOPs, covering 13.5 million employees and making it the nation's most common type of employee ownership. ESOP's have a number of benefits, but can be expensive to set up and have a few other drawbacks.

Setting up an ESOP

Usually, corporations give, rather than sell, ESOP shares to employees. Regulations require the company to create a trust fund to administer the ESOP. The company can contribute cash or shares to the trust directly, or the trust can borrow money to buy the company's shares and then receive reimbursement from the company. The company takes a tax deduction for contributions to the ESOP. In public companies, ESOP shares give employees full voting rights. However, private companies might limit employee voting rights to only major issues, such as a plant closing.

How ESOPs Work

Each employee in the plan has an individual account that receives shares from the trust. Normally, all full-time employees above age 21 can join the ESOP. Some metric, such as salary and/or seniority, determine each employee's share allocation. Share ownership is "vested" -- employees must remain with the company for a specified number of years, usually between three and six, to gain full ownership of their ESOP shares. Upon separating from the company, the employee takes the vested shares, if publicly traded, or receives the stock's fair market value from the company.

Uses of ESOPs

Frequently, closely held companies set up ESOPs to buy shares from departing owners as a reward for service. An ESOP provides a way to create additional employee benefits and thereby foster loyalty. ESOPs also offer several tax benefits. Corporate contributions of cash or stock to the ESOP are tax-deductible, and when an ESOP trust borrows money to buy shares, the corporation can deduct the reimbursement to the trust of principal and interest. The corporation can deduct the cost of dividends paid on ESOP shares. Employees may qualify for certain tax deferrals when selling ESOP shares and can roll the shares into an individual retirement account tax-free.

ESOP Cautions

Even the simplest ESOP can cost about $40,000 to establish, which might be unacceptably high for a small company. Regulations do not permit professional corporations and partnerships to use ESOPs. S corporations can establish ESOPs but are subject to lower contribution limits. A private company must buy back vested ESOP shares from departing employees, which can be a significant expense, especially in a mass resignation or layoff. Another drawback of ESOPs is that the shares issued to employees dilute the holdings of other shareowners.

Tax Tips for Farmers

Article written by EricBank

In America, there is no small business more respected than the family farm. Yet for some reason, we have devoted very little blog space to the business of farming. We correct that oversight today by summarizing some important tax tips that farmers need to know.

Every State Has Farms

Farming is a big small business, with small family farms in all 50 states. For example, the Farmland Information Center discloses that the 15,000 farms in Arizona occupy more than 26 million acres. Agricultural and dairy farms are distinctive businesses that force farmers to weigh decisions carefully, in part to take tax consequences into account. That's no problems for large corporate farms that hire full-time farm accountants. However, small farms also need to know the tax laws because it can make the difference between a profit and loss for the year, and small farms often don't have a lot of resources to survive losses.

Crop Method of Accounting

Farmers generally use either the cash accounting or accrual accounting method. But did you know that the IRS also allows the crop method of accounting? Under this regime, you can defer recognizing expenses for crops sold in the year after sowing. You deduct all crop production costs, including seedlings and seeds, in the year you sell the crop, not the year you spent the money. That might be good or bad, but is generally helpful if your have a loss in the planting year, because you might avoid cumbersome loss carryover rules. 

Cash Accounting Affects Deductions

If you adopt cash accounting, keep in mind that, according the IRS, your deductions for prepaid expenses are limited to half of your other farm expenses that qualify for deductions. Prepaid expenses include the cost of feed, seed, supplies, fertilizer and any poultry -- usually chicks -- you bought that you were unable to sell. However, you might receive an exception if you had to alter your operating procedures due to unforeseen situations. Another exception is available if your prepaid expenses in the last three years amounted to less than 50 percent of all other deductible expenses in that period. 

Farm Inventory

If you operate a chicken hatchery and utilize accrual accounting, your incubating eggs are part of your inventory. You also include any livestock you want to sell. It's up to you whether to depreciate dairy, draft and breeding livestock or include them in inventory. If you run a fur farm, include the cost of the fur-bearing animals in inventory. Treat your growing crops as inventory, but if you need more than two years to produce finished crops, you can capitalize their costs. For instance, you can capitalize new wine-grape vines since they normally take at least three years to create a usable crop.

Inventory Valuation Methods

Farmers can use the farm-price method, which assigns the cost of each inventory item at its market price minus any selling costs, such as freight, commissions and transportation to market. Ranchers can pick the unit-livestock-price method: You classify your livestock by age and type and then use a standard unit price for each animal within each group. Include in inventory all your raised livestock. You can, however, exclude feed hay from inventory. Exclude sold or lost animals.

Preventing Inventory Shrinkage Using Your Computer

Article written by EricBank

The National Retail Security Survey (NRSS) reports that Inventory shrinkage -- the vexing disappearance of items for sale -- bled U.S. retailers for over $34 billion in 2011. Small businesses are especially vulnerable, because they may not have good controls or systems to fight shrinkage. However, a small investment in a computer system and perhaps some security cameras can make a big improvement for not much money. Here's is how a small business should proceed.

Data Capture

The first order of business is to detect where shrinkage is occurring. Identifying your vulnerable areas lets you know where to allocate your time and money. It's pretty easy to track inventory nowadays thanks to cheap and sophisticated barcode technology. In fact, barcoding has allowed many merchandisers to adopt a perpetual inventory system, giving them timely information regarding the location, count and movements of inventory items. The scanners are not expensive, so you can deploy them wherever needed, from your receiving area to your cash registers and shipping dock. Using off-the-shelf software, you can quickly compare warehouse scans with order invoices to discover items missing from a shipment. Portable scanners let you make surprise spot checks at any time and may indicate areas where you need security cameras.

Employee Theft

The 2011 report from the NRSS estimated employee thefts to account for 43.9 percent of all shrinkage, the largest component of the problem. Having identified the problem locations in your store, vehicles or warehouse, you can use work records to see if there is any relationship between shrinkage incidents and certain employees. Analysis might reveal suspicious patterns involving workers who drive delivery trucks or work in your storage areas. Broadcast the fact that you are taking steps to catch employee stealing -- this alone can be a deterrent, especially to the casual perpetrator. If you catch a worker red-handed, you should prosecute them to set an example and show that you are serious. You should also set up fake thefts to see how well your system catches it.

Shoplifting

Shoplifting is common at retail locations. You might detect the most vulnerable merchandise by frequently spot-checking your inventory reports against physical counts. Once identified, you can post signs, install extra lighting, station store security persons strategically, add monitoring equipment -- anything to tip the scales in your favor and away from shoplifters. Your computer system can alert you to missing items that never passed through the scanners at your cash registers.

Errors and Fraud

A computerized system helps prevent honest errors, such as entering the wrong numbers or illegal item codes on orders, invoices and other documents. Beware the rogue employee who occasionally games the system. For example, in a manual environment, a purchasing manager might try to enter an inventory receipt for goods never ordered and then steal the payment made to a non-existent supplier. The right surveillance and computer equipment can prevent you from paying for imaginary inventory. Prominently display your daily system reports such as cancellations, returns and voided transactions, in order to deter theft by checkout employees.

Top 10 Tactics for Consultancy

Article written by EricBank

Many small businesses deal with services rather than products. Well-trained individuals might be interested in offering their services as management consultants. Often, experts who have worked in a particular industry for an extended period decide to branch off into management consulting. Each industry has a learning curve that requires years to master. However, once mastered, this knowledge is exceedingly valuable and can serve as the basis of a successful consulting career.

For those with the necessary expertise, this can be as fulfilling and remunerative business. You should consult with legal and accounting resources to work out the feasibility and business plans required to start up the company. We have identified 10 important tactics to help ensure the success of your new consulting career:

• Newsfeeds: Arrange to have the latest news about your client and three of its competitors fed directly to you. You can use a service like Google Alerts. Nothing beats staying on topic of client and industry news to make a good impression. 
• Financial Data: Memorize key financial statistics, such as overall revenue, market cap, gross profit and margins. You'll look like a genius at meetings if you know these numbers cold.
• Senior Management: Learn the faces and profiles of the client's top executives. You don't want to innocently run into one in the cafeteria and not know it. Familiarity with the executive staff will help you manage client relationships.
• Competitors: Get to know the top five to ten competitors, including their market shares, key offerings, strengths and weaknesses. You can gather this data from analyst reports, client intelligence, and financial websites such as Yahoo! Finance. Keep your knowledge up to date by frequently searching Google and Techcrunch.
• Contacts: Use a contact management system that works equally well on your computer and smartphone. Keep phone numbers and email addresses of each contact and his or her secretary. Great resource when you need to reach someone quickly.
• Institutional Knowledge: Assimilate the knowledge libraries of your consulting firm and clients. This is basically information about previous projects and the firm's latest strategic thinking. This is the fastest way to come up to speed on a new project.
• Entertainment: Get to know some good restaurants favored by your clients. These are good for team events and a popular choice will score points. 
• Project Library: Assume leadership of a project library that contains annual reports, tax filings, previous documents and presentations, and primers on the client's industry. Keep the library up-to-date with new reports and presentations as they become available.
• Travel Smart: Always carry extra supplies, such as Ethernet cables, USB drives, mice, power cords, etc. You may seldom need these, but when you do, you'll be the hero.
• Proofread: Never hand in a document to a client without thoroughly proofreading it, even if is not your personal work. Sloppy work is a killer - remove all typos, syntax and grammar errors and misaligned charts. Make sure the analysis makes sense. Failing to do this can be fatal to your career.

Advantages of Consignment

Article written by EricBank

Merchandizers, retail stores, kiosk operators, artisans, artists and tiny manufacturers can all benefit from the consignment method of selling. It's a useful alternative for selling goods that reduces the retailer's need to pay for inventory in advance. This allows the retailer to use the savings for other purposes, such as expanding its purchases inventory or improving its facilities. It also shifts the risk of an item not selling from the merchandizer, or consignor, to the supplier, or consignee, especially if the merchandizer has extra display capacity that would otherwise lie fallow. Let's take a closer look at the advantages of selling on consignment.

How Consignment Works

Using the consignment method, a retailer is cast in the role of consignor for goods provided by the consignee. The consignee might be a local artist or artisan, such as a sculptor, toy maker, baker or clothing maker. There are dozens of small mom-and-pop operations that would rather sell on consignment than make other, more complicated arrangements. It's the consignee's job to produce or otherwise supply goods for sale but employs the consignor's store to market and sell its wares. The storeowner doesn't have to fork over any money in advance to the consignee -- rather, it just makes some space and time available to display the goods and handle the sales transactions. The consignee doesn't get paid by the consignor until a sale occurs, and the consignor keeps a portion of the sale proceeds, which is usually almost pure profit. If any of the goods don't sell, the consignor returns them to the consignee. In this case, the only cost to the consignor is the opportunity cost of the sales foregone had it instead displayed other, more popular goods; otherwise, there are no out-of-pocket costs to the consignor. It is the consignee's responsibility to deliver and remove its merchandise. It may also need to periodically come to the retail location to dust off the merchandise and check that all items are accounted for.

Cost Savings

 

Consignment conserves the retailer's money, because it doesn't buy the inventory. The consignor thus minimizes overhead costs, such as those for storage, insurance and transportation. In addition, because the retailer doesn't pay for consigned goods, it collects revenue before sharing the proceeds with the consignee. The arrangement reduces the consignor's need to borrow funds to pay for its inventory, thereby reducing interest costs. Of course, this put more of the financial burden on the consignee.

Convenience

 

Consignment selling is a convenient time-saver for the consignor, who doesn't need to reorder stock, because the consignee will quickly replenish sold items. This furthers the consignee's goals by ensuring its goods are always available for sale. For certain merchandisers, such as catalogers and website storefronts, that do not stock inventory but rather order goods only to complete a sale, have fast, easy access to consigned goods because the consignee wants to facilitate a sale. Sometimes, consignees will physically arrange their goods for display in the consignor's facility, saving the retailer both time and labor costs.

Market Penetration

 

A consignee benefits by the opportunity to display its goods to the public and thereby stimulate demand. A retailer might be more willing to show new products from a consignee than from a conventional source because of the various benefits of consignment. For example, it might temporarily display consigned seasonal or holiday items that it would otherwise avoid because of limited demand. By explaining the many benefits of consignment to a retailer, a consignee can gain a foothold to compete with products sold through conventional methods.