Certain product sellers, especially in the food service industry, deal with perishable inventory. It’s one thing to take an annual inventory of items with a shelf life of multiple years, but how do you account for inventory that can expire in just a few days? Review these tips for dealing with perishable goods without hurting your bottom line.
Use an Appropriate Inventory Method
Normally, a commercial business should perform a manual inventory count once per year to accurately report sales, expenses, and losses, but for businesses like restaurants, food trucks, and grocery stores, a once-per-year inventory system is inadequate for determining how much inventory is lost to spoilage. If you are operating a food service business, you’ll likely need to employ a more frequent inventory system. Grocery stores that sell refrigerated or frozen foods and raw ingredients should perform a physical inventory count multiple times each year. If you operate a restaurant in which fresh foods are stocked for immediate or near-immediate consumption, you may benefit from using a single-period inventory system. This type of inventory system means performing an inventory count before ordering new stock, thus ensuring you don’t order excess inventory of an item already in stock.
Claim Perishable Inventory
Even with diligent and regular inventory checks, most businesses in the food industry occasionally lose some products to spoilage. Keeping detailed records of any inventory you do lose can help you avoid excessive monetary loss when you file your taxes. At the end of the tax year, you’ll need to calculate your total inventory value. These calculations include the money you spent on inventory during the year, minus the money you made from goods sold, plus the value of the existing inventory you had at the beginning of the year. This number is your cost of goods sold and is subtracted as a business expense from your gross revenue. If you keep clear records of inventory that perished before it could be sold, the cost of this inventory shows up on paper as a higher COGS amount and further reduces your taxable income for the year.
First-In, First-Out Inventory
Businesses that sell products, including food, have a few different options when it comes to how to calculate inventory value. The first-in, first-out, or FIFO method, is often advantageous for companies with perishable inventories. Using this system simply means you assume the items that were purchased first were also the first items sold. The FIFO system helps regulate your COGS on paper, which gives your company a higher profit margin. This system of inventory valuing is helpful if you want to apply for a loan and need to prove your company is profitable. On the other hand, it also means slightly more of your income is subject to taxation. Perishable inventory demands detailed record-keeping and a solid understanding of Canadian tax law. With frequent inventory counts and smart accounting, your food service business should be off to a good start.