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 cash flow and 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 and protect the profit margins.
Tariffs are government-imposed taxes on imported goods from other countries. Tariffs 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, it can significantly affect how that inventory is valued.
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. 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 accurately reflected in business financial statements, financial leaders also need to consider the changes they may need to make to support long-term operations.
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. Also, drawing on forecasting tools can also come in handy for businesses that are looking to prepare and plan for all kinds of different scenarios and possibilities.
One common question many business leaders have is how to adjust and reflect tariff costs in customer pricing while maintaining price competitiveness and customer relationships. This is a decision that should only be made after careful deliberation, planning, and forecasting.
For businesses that decide to pass these costs along to consumers, doing it strategically is critical. Rather than imposing a blanket price increase to consumers, for example, some businesses may consider applying temporary “tariff surcharges” that do not 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.
If your business is affected by increased tariff costs or facing uncertainty around tariff accounting, now it is time to consult with a strategic financial advisor. Contacting your advisor can help to mitigate the impact of tariffs on operations while remaining in compliance with financial reporting and accounting standards.