3 Ways Inventory Management Software Makes Tax Time Less Painful

Automating your inventory tracking keeping taxes in mind will save you stress and probably money, too.

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By John Boitnott • Mar 3, 2015

Opinions expressed by Entrepreneur contributors are their own.

Tax filing can be a grueling time for businesses, with leaders scrambling to compile information on lost inventory, income and expenses throughout the year. Even businesses that use automated accounting will be challenged to keep up with the first of those items, since inventory control is often tracked separately.

With automation, a business can create a seamless process that counts inventory as it enters and exits. When tax time rolls around, business owners can then export reports that ease the pain of calculating and filing. Here are three ways inventory management software can automate your business's tax accounting.

1. Separate assets.

If a business has only one location, asset tracking is easy. But as a business grows, a company is challenged to track inventory between multiple locations, as well as an online store in many cases. These multi-location enterprises need the ability to move inventory from one spot to another with each one marked in a way that makes its location clear.

At tax time, professionals need the ability to manage this inventory in a way that makes sense. Businesses will likely have a need to separate its online sales from its on-site sales. For companies with multiple brick-and-mortar locations that span several states, state income tax will need to be filed separately for each one. Inventory software allows information to be extracted separately or altogether as needed.

"The latest generation of inventory management apps have transformed the way small and medium-sized businesses take control of their stock," says Christophe Primault, co-founder and CEO of GetApp, an online service that ranks apps. "Applications such as Stitch and Unleashed include sophisticated tools for tracking inventory in real time. These apps offer businesses the chance to automatically sync their online and offline sales channels."

Related: Tackling the Unsexy Business of Inventory Management

2. Track inventory intelligently.

For tax purposes, the way a business costs its inventory can make a big difference in taxes that business pays on earnings. The most common method businesses use for valuing inventory is the Last In, First Out (LIFO) accounting technique. With LIFO, it is assumed that the items that a business acquires last are the ones it sells first. With First In, First Out (FIFO) accounting, items are assumed to be sold in the order they were received. In some instances, FIFO can be more beneficial to a business while in others, LIFO is the best.

Inventory software gives a business the flexibility it needs to use the accounting method that works best for its unique circumstances. As a business grows, its accounting staff may recommend switching its accounting method to save money. With inventory management software, this can be accomplished with a tweak to the system rather than having to retrain employees and rework spreadsheets.

Related: Tracking Inventory Have You Stressed? Try These 5 Mobile Apps

3. Calculate losses.

As a business grows, the number of products it keeps in stock will probably begin to grow at an accelerated pace. The methods used to track these products can gradually become ineffective, as professionals quickly learn just how difficult it is to keep track of so many items as they come and go.

Inventory tracking software allows a business to always remain fully aware of the number of products in storage, in transit, and on order for all of its locations at all times. By conducting physical inventories to make sure the items on shelves match what has been logged in the system, administrative staff will be able to readily identify missing items, allowing them to catch theft much more quickly than they would have if they'd waited for an annual paper-based inventory. This information comes in useful at tax time, when accountants can use it to help a business claim a loss on those items, which will bring a cost savings each year.

Inventory management software is an essential tool for any business that deals with storing and shipping products. With the right tool, a business can easily go from managing inventory throughout the year to extracting the information it needs to file taxes. This saves everyone time and helps avoid costly errors due to missed items.

Reated: Inventory Out of Control? Take Stock With These 3 iPad Apps.

John Boitnott

Entrepreneur Leadership Network VIP

Journalist, Digital Media Consultant and Investor

John Boitnott is a longtime digital media consultant and journalist living in San Francisco. He's written for Venturebeat, USA Today and FastCompany.

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