2018 INVENTORY BOOTCAMP

Transcription

1 2018 INVENTORY BOOTCAMP If you haven t kept up with your inventory tracking as much as you originally planned, or are just starting out with Craftybase this book is for you!! 1 of 17!

2 Introduction... 3 Bookkeeping Basics... 4 Perpetual Inventory Tracking... 4 Weighted Average Cost... 4 Accrual Method... 5 Current Situation... 7 Section 1: New Business Strategy... 9 Tasks... 9 Going Forward... 9 Section 2: Switching Inventory Valuation Methods Tasks Going Forward Section 3: Catching up in Craftybase Tasks Going Forward Section 4: Switching from another Inventory System Tasks Going Forward Section 5: Seeking initial bookkeeping advice Summary Other ebooks... 17! 2 of 17!

3 Introduction If you haven't quite been as organised as you would have liked last year - don't panic, it happens to the best of us! We'll guide you through the steps you need to take to get your records in tip top shape in this ebook.! 3 of 17!

4 Bookkeeping Basics! This section is a quick introductory primer on the major concepts for bookkeeping that you ll want to be aware of when deciding on how to begin tracking your inventory with Craftybase. It may seem a little dry and boring, but having a little knowledge can be really helpful to visualise how your stock moves through the system and how it is costed. Although we have designed Craftybase for the specific needs of US users, we do have businesses based in different countries that are successfully using our software. Many tax systems use very similar calculations for Cost of Goods Sold (COGS) and Inventory value at end of year, so it's quite possible that our calculations will also be applicable. We recommend that you seek the advice of a bookkeeper or accountant to confirm that this is the case before using our system for any tax reporting purposes. Perpetual Inventory Tracking There are two generally recognised ways of tracking inventory: Periodic and Perpetual. Periodic systems involve undertaking a complete count of your inventory at least once a year and logging this information as a snapshot in time. In between counts, it is not possible to know your current stock levels. Excel spreadsheet programs are examples of this way of tracking your inventory - they are useful for very small businesses with low levels of turnover but can quickly become hard to manage as your inventory demands become greater. Craftybase is a Perpetual Inventory System which means that stock changes are entered and calculated in real time rather than once or twice a year. Every time a material purchase is made, a product is manufactured or an order is shipped this is recognised as a stock change. All stock changes trigger complex recalculations that have an impact on your unit costs - this results in a system that can tell you exactly how much stock you have on hand and exactly what it is worth. Weighted Average Cost Craftybase uses the Weighted Average Cost for your Material and Product cost unit values. This inventory costing strategy is also known as the moving average or rolling average method.! 4 of! 17

5 This is an accepted IRS / GAAP method of accounting for inventory and is the one most commonly used in manufacturing situations as it effectively allows for "pooling" of like materials - this is in contrast to FIFO / LIFO in which individual usage of materials needs to be tracked and logged. The Weighted Average Cost method involves recalculating all unit costs for materials and project material cost each time any change is made to inventory levels based on the amount available in stock at each point in time. Each time a stock level is changed, a audit record is added to the system with details of the change. For materials, changes to inventory levels occur when more of the same material is purchased, or a manufacture is created using some of the material. For projects, changes to inventory levels occur when the product is manufactured or sold. The best way to visualise how weighted costing works is by imagining boxes - one for every single one of your different materials and products. Each time you add or remove more stock to one of your boxes, your unit price for the box recalculates instantly for every material or product inside. Adding lots of stock with a low unit cost will dilute the unit cost for all stock in the box - they will all be slightly cheaper as a result. Likewise, adding stock with a high unit cost will increase the cost of all stock inside the box. Accrual Method Craftybase uses the Accrual Method for all reporting. This means that the revenue or expense is included when initially raised, not when it has been paid. For expenses, this would be the date where the stock was purchased and for orders this is the date of sale. The main reason is that perpetual inventory systems need to track two things: how much your stock is worth, and exactly when the stock enters and leaves your possession. As the cash method provides the possibility for stock to be received and sent without the associated revenue and loss being accounted for beforehand, this! 5 of 17!

6 can create a mismatch between stock costings, your total revenue and your tax liabilities. For example, using the cash method if you have a 60 day payment term on a customer account you could send the order in November and they would settle the payment outstanding in January. The cost of the goods sold in November will be factored into your Cost of Goods Sold via your final inventory value at end of year, however the revenue generated (that you may be wanting to offset) would not be able to be accounted for until the next tax year.! 6 of! 17

7 Current Situation! The first thing to do is to determine your current situation so that you can figure out your inventory and tax strategy.! 7 of 17!

8 You ll need answers to the questions below: 1. Did you start your business before 1 Jan 2017? If you are a new business that began in 2017, you ll want to follow the instructions outlined in Section 1: New business strategy 2. Did you claim your material usage as indirect expenses in your 2016 tax year (1 Jan Dec 2016)? If you tallied up all material purchases and claimed the total rather than calculated as COGS (Cost of Goods Sold) then you have previously claimed as indirect expenses. See Section 2: Switching Inventory Valuation Methods for details on how to make the change between indirect expensing and COGS expensing. 3. Were you tracking your inventory stock and costs during 2017? If you haven t been tracking your inventory or direct expensing, you ll want to see Section 5: Seeking initial bookkeeping advice to see how to rectify the situation going forward. 4. How were you tracking your inventory in 2017? If you were using a different system, turn to Section 4: Switching from another inventory system. If you were using Craftybase and need some advice on how to catch up, see our Section 3: Catching up in Craftybase.! 8 of! 17

9 Section 1: New Business Strategy If you started your business sometime in 2017, then April 2018 this will be your first tax return. You ll want to firstly establish what manufacturing records you have available for If you feel you can accurately reconstruct these, then you ll want to aim towards backdating to your business start date in Craftybase to enable you to use your inventory values as COGS for your Schedule C. Tasks Enter all material expenses Enter all manufactures 1 Import sales from sales channels Manually enter sales from offline channels Create adjustments to represent damaged/lost stock Going Forward From here, you ll want to ensure that you work forward from today on a constant basis through the year: entering in expenses as you receive them, manufactures as close to when they happen and orders as they are placed. Also remember to regularly cycle count your product and material stock to ensure that your records are accurate. 1 If you feel you can t accurately create your manufacture records for 2017, you may want to consider claiming your 2017 expenses as indirect and instead begin tracking for In this case, turn to Section 2 for more details. You ll want to discuss this strategy with your financial advisor first to discuss ramifications to this approach.! 9 of! 17

10 Section 2: Switching Inventory Valuation Methods If you have been previously claiming your material usage via indirect expenses then to start using Craftybase you ll need to either: a) Switch your inventory valuation method for 2018 OR b) Refile previous years so that all inventory calculations are based on COGS and backdate You ll want to your options with your tax advisor first before making a decision here. If you switch from indirect expenditure to COGS and also have significant inventory to bring forward into 2018, this may result in a lower material expendure total for the coming tax year and thus a higher tax liability. If you signed up for Craftybase during 2017 but never really got going, then you might want to consider resetting your account to remove all 2017 data and use 1st Jan 2018 as your starting point in Craftybase. In this case, you ll be potentially looking at submitting your 2017 tax return based on indirect expensing as per prior years and aiming for your 2018 return to be the first using a COGS method 2. Tasks Reset your account to remove any 2017 data (if necessary) Stocktake all materials on 1 Jan Create a spreadsheet with the current stock on hand and a unit cost of zero 3. Import your spreadsheet, or manually create your material records in Craftybase. Import your sales channels, ensuring that your first import has a starting date of 1 Jan 2018 to prevent past orders and expenses 2 Discuss this strategy with your financial advisor first to discuss ramifications to this approach. 3 If you have been claiming materials as indirect expenses (i.e. tallying up all purchases and claiming the entire amount) then your unit cost for each of your materials as of 1 Jan 2018 will be 0.00 as you have already fully claimed the cost of this purchase in the previous tax year.! 10 of 17!

11 being created in the system (or alternatively create your products manually if you don't use sales channels) Perform a stocktake of all products you have on hand Set your Starting Adjustments for each of your products to match your current stock numbers with a unit cost of zero 4 Going Forward From here, you ll want to ensure that you work forward from today on a constant basis through the year: entering in expenses as you receive them, manufactures as close to when they happen and orders as they are placed. Also remember to regularly cycle count your product and material stock to ensure that your records are accurate. 4 If you have been claiming materials as indirect expenses (i.e. tallying up all purchases and claiming the entire amount) then your unit cost for finished product as of 1 Jan 2018 will be 0.00 as you have already fully claimed all materials in the previous tax year.! 11 of 17!

12 Section 3: Catching up in Craftybase If you signed up for Craftybase during 2017 but never really got going, then you might want to consider resetting your account to remove all 2017 data and use 1st Jan 2018 as your starting point in Craftybase - see Section 2 for details. If you started well but slipped at some point, then you ll want to first figure out if there was a certain month that things begun to slip with your record keeping. This is where you'll want to focus initially with your backdating, and then you'll want to perform a manual stocktake on 1st Jan to ensure that your numbers today are correct going forward. Tasks Gather your material expenses together (paper and electronic) from the date you stopped tracking in Craftybase and enter them in to update your material stock levels. Create any missing manufactures, ensuring that they are dated as close to when they occurred to ensure that your orders are costed correctly Perform a manual stocktake of all materials you have on hand by printing out your Physical Material Worksheet, then account for any differences between the CB tally and your manual one 5. Review your imported orders to ensure that they are all accounted for correctly. Enter any manual sales from offline sources. Generate your Physical Product Worksheet and then perform a manual stocktake of all unsold product to compare numbers 6. 5 If your manual material tally is higher than your Craftybase one, you may be missing expenses; if the manual tally is lower than your Craftybase, then you might be missing manufactures. Any miscellaneous loss can be accounted for using material adjustments. 6 If your manual product tally is higher than your Craftybase one, you may be missing manufactures; if your manual tally is lower then you might be missing some orders. Any miscellaneous loss of product can be accounted for using product adjustments.! 12 of 17!

13 Going Forward! From here, you ll want to ensure that you work forward from today on a constant basis through the year: entering in expenses as you receive them, manufactures as close to when they happen and orders as they are placed. Also remember to regularly cycle count your product and material stock to ensure that your records are accurate.! 13 of 17!

14 Section 4: Switching from another Inventory System If you have been using another system to track your inventory values, instead of attempting to backdate all data into Craftybase it s much easier to set a switchover date and work forward from here. Typically, it s best to choose the 31 Dec / 1 Jan as this way you ll be able to pick tallies from both systems for your tax. If you switched to Craftybase during 2017 but never really got going, then you might want to consider resetting your account to remove all 2017 data and use 1st Jan 2018 as your starting point in Craftybase instead. In this case, you ll be filing this years return with data from your previous system (see Section 2 for more details). Tasks Reset your account to remove any 2017 data if necessary Download the material import spreadsheet, then manually stocktake all materials you currently have on hand, entering all materials with current stock numbers (Starting Quantity) and an accurate cost of each unit purchased (Item Unit Price) 7. Import your spreadsheet to create your material records in Craftybase Import your sales channels, ensuring that your first import has a starting date of 1 Jan 2018 to prevent past orders and expenses being created in the system (or alternatively create your products manually if you don't use sales channels) Perform a stocktake of all products you have on hand Set your Starting Adjustments for each of your products to match your current stock numbers with an accurate cost of materials to produce a single unit 7 Your unit cost should be calculated from your previous system and entered into Craftybase.! 14 of! 17

15 Going Forward From here, you ll want to ensure that you work forward from today on a constant basis through the year: entering in expenses as you receive them, manufactures as close to when they happen and orders as they are placed. Also remember to regularly cycle count your product and material stock to ensure that your records are accurate.! 15 of 17!

16 Section 5: Seeking initial bookkeeping advice If you haven t filed any prior returns for your business, you are best to seek the advice of a bookkeeper to discuss how you are best to address this issue as it will affect how you start using Craftybase. If you don t yet have a tax adviser, contact SCORE - this is an organisation that provides free business mentoring and advice.! 16 of! 17

17 "! Summary We hope this book has been useful and you are now ready to get your inventory under control for if you have any further questions, please do get in touch: Craftybase Support help@craftybase.com Craftybase Facebook Community craftybase/ Other ebooks Inventory for Handmade Success Our ebook introduces online craft sellers to the absolute basics of inventory in an easy to understand way, giving you the knowledge you need to finally get your inventory, costs and taxes under control. Topics covered include: - Reasons why inventory tracking is essential for handmade business - Inventory Assets vs. expenditures - Supplies and materials - Direct and Indirect Expenses - Methods of Valuing your Inventory - Perpetual vs. Periodic Tracking - Stocktaking Strategies Introduction to Craftybase Our ebook goes through the Craftybase concepts and features you'll need to know to get your inventory, costs and taxes under control: once and for all! Topics covered include: - Accounting Methods - Tracking Products and Variations - Material Inventory - Expense Tracking - Order Management - Manufacture Workflow - Calculating COGS - Stock Backdating Strategy! 17 of 17!