Today, increased tariff costs are an unfortunate reality for many businesses. As companies must pay higher tariffs on goods and materials imported from certain countries, many business leaders are wondering how these tariff increases may affect their financial well-being and even their inventory accounting.
With a more comprehensive understanding of the potential impact of higher tariffs on inventory accounting and how financial leaders can react to these tariffs, it may be possible to keep businesses profitable despite higher operational costs.
More specifically, tariffs (or government-imposed taxes on imported goods and materials) can affect a company's inventory accounting in the sense that these tariffs ultimately become part of the total cost of inventory. As a result, they impact inventory valuations and, by extension, inventory accounting practices.
Consider, for example, that tariff costs must be factored into the acquisition costs of any imported goods. This, in turn, means a higher cost of goods sold (COGS) when that inventory is sold down the road.
When it comes to financial reporting, then, tariffs must be directly reported in higher COGS on their balance sheets. In some cases, businesses may also be required to disclose the impact of major tariffs on their financial statements. All of this can make financial planning and reporting increasingly complex, requiring businesses to follow accounting best practices not just in reporting, but in decision-making and compliance as well.
Aside from ensuring that tariff costs are properly reflected in business financial statements, financial leaders also need to consider the changes they may need to make in order to support long-term operations despite higher operating costs.
For instance, some businesses may benefit from the use of enterprise resource planning (ERP) systems to better track changes in tariffs and other inventory procurement costs. From there, these solutions may be used to plan inventory, accounting and pricing of goods accordingly. Businesses facing higher tariffs may also benefit from reviewing their current suppliers. In some cases, for instance, it may be more practical to switch from imported goods to domestic suppliers. Of course, this is a change that requires extensive research and planning.
Drawing on forecasting tools can also come in handy for businesses that are looking to prepare and plan ahead. Although higher tariffs may not be going away anytime soon, businesses can use forecasting tools as a means of planning ahead for all kinds of different scenarios and possibilities. This way, no matter what may lie ahead, it is possible for financial leaders to be prepared.
One common question many business leaders have when they're hit with higher tariffs is if (and how) these increased costs should be passed along to the end-consumer. Ultimately, this is a decision that should only be made after careful deliberation, planning and forecasting.
For businesses that do decide to pass these costs along to consumers, doing so strategically is critical. Rather than imposing a blanket price increase to consumers, for example, some businesses may have better luck by applying temporary “tariff surcharges” that don't require a complete reworking of existing price structures.
Other businesses may explore changes to contracts that allow consumers and businesses to share tariff increases as they occur. This can be a great way to mitigate costs in a way that is flexible and adaptable based on circumstances, although it may not be suitable for all consumer-business relationships. Still, it's an option worth exploring for companies that enter into contracts with their customers as part of their business plans.
Higher tariffs on imported goods from certain countries don't seem to be going anywhere anytime soon, leaving business financial leaders no real choice but to factor these increased costs into their long-term strategic plans. From accounting for increased tariffs in costs of goods sold (COGS) and knowing how to deduct these costs as business expenses, it may be possible to overcome some of the operational challenges that can come along with tariffs.
If you're a financial leader for a business that's being affected by increased tariff costs, now is the time to consult with a strategic financial advisor.
If you have any questions or would like more information, please contact our accounting services team.