Physical Inventory Counts - Explained in English

When the clock turned 12:00 a.m. on January 1st I yelled out, “Yeah!  It’s a new tax year!” My husband kissed me and whispered in my ear, “Honey, you are such a nerd, only you would say such a thing.”

2008 was a hard year for everyone. Every IRA and 401k was pounded by pitiful stock market conditions.  We watched the smartest-of-smart fumble in guiding our economy. Elected officials agonized and politicized a bailout for a corrupted banks and fledgling car companies. We had record high gas prices and we lived to tell about it. Sigh. Aren’t you glad it’s over?

Now that 2008 is over, you have some work to do for your business!  Whether you are new to the business, have been in forever, or know someone who is new to the business we want to translate some of the New Year mumbo-jumbo so that it makes sense to you.  As you read this, remember that we are having several special webinars over the next month.   On January 29th at 4:30 pm PST we have a special webinar called It’s Not Too Late for 2008  https://www2.gotomeeting.com/register/338642031

Physically Count Your Inventory
Most MK professionals know they need to physically count the inventory at the beginning of every new year, but very few know why. Count your inventory because it gives you a start and end point to calculate the value of unsold product on your shelf.  This value will be measured against your total product purchases for the year.

Example:
Let’s say on Jan 1 you had $3600 wholesale on your shelf, and through the year you purchased $600 wholesale every month.   If you sold $1000 retail monthly, you’d net out with a total year end inventory of $4800.  Here’s how the math looks:
•Jan 1  $3600 ws beginning inventory
•Purchased $600 ws every month = $7200 total
•Sold $1000/mo. retail ($500ws) = $12000 total
•Dec 31 year end inventory is $4800

Most of our clients don’t understand that you cannot deduct the cost of inventory until AFTER you’ve sold it. This becomes known and reported as Cost of Goods Sold (COGS). If someone told you that you get to write off the cost of your unsold inventory, be clear that IRS will put a big kibosh on that one!
Yet another great reason to get out there and sell, sell, sell your shelf!

What’s the best way to do a physical inventory count?
We think the best way to do your count is to start an Order in InTouch as if you were going to create a new product order.  Then systematically go thru the catalog and enter the quantities you actually have on hand for every item on your shelf.  The GREAT thing about this is that InTouch will be doing the adding for you, all you have to concentrate on is putting the right quantity in each field.   We recommend that you print the order up after it is complete and save it in your permanent tax year records.

As much as we are raving fans of our sister company Pink Office and all the fancy inventory reports that you can get from it, IRS says you have to do a physical count, so don’t try to cut corners.  Also, try not to touch any box more than once. Doing a count like this is a perfect time to identify expired or unsellable product (e.g. if it isn’t in the Look Book, you may not be selling it).  Expired product needs to be removed from your shelf and tossed; unsellable products may be donated and you may deduct it. It is way better to give it away for a deduction then to let it sit there collecting dust, in our humble opinion. Talk to your accountant for more specifics on handling unsold, expired product where your taxes are concerned.

Yikes!  I didn’t count my inventory on Jan 1.  What do I do now?
Don’t panic.  This is common, and fairly easy to fix.

1. Start by counting what is physically on your shelf.
2. Then take your pink tickets (or) invoices from Pink Office and add up the wholesale cost of everything you’ve sold in the month of January.
3. Take the total wholesale cost of your sales in January and add them to the total you got when you did your physical count.
4. Breathe, you did it!