WARNING! Please Include the Hidden Costs of Importation in a Cost of Goods Analysis
Six questions companies should ask themselves when considering importing goods.
In my capacity as a financial advisor to small businesses, I always review historical financial statements.
Profit and loss statements seldom include the soft costs of purchasing imported goods as part of the cost of goods sold. These indirect costs; freight, tariffs, interest expense on borrowed funds, and rental expenses for storage of merchandise, are shown on P&Ls as operating expenses.
When these costs are reflected as operating costs rather than costs of goods sold, the gross profit margins do not represent the accurate costs of the merchandise A wise business owner makes a deeper evaluation of the financial statement to determine the hard and the soft costs relating to importing merchandise.
Here are six questions management of B to B and B to C companies should ask themselves when considering importing goods:
1. Are the costs of duties and tariffs included in the cost of the merchandise?
2. Do I have to borrow funds in order to place a purchase order with a company not located in the U. S.?
3. Have I calculated the interest charge for the borrowed funds as part of the costs relating to importation?
4. If I did not carry so much inventory, would my storage costs be reduced?
5. Did I properly evaluate the amount of inventory needed to meet the upcoming demand or did I order more than I needed, anticipating possible delays in shipping?
6. How many inventory turns do I have in a year?
The answers to these questions differ, depending on the product, the market, the seasonality of the business, and the financial strength of the operating company.
In all cases, importing goods has additional costs that must be included in a cost of goods evaluation. When the period of time from placing an order to selling the goods and receiving payment is shortened, the profit margins usually increase and payments from customers are received within a shorter time frame.
In most cases purchasing goods in the U.S. may reflect a higher purchase price per item, but consideration should be given to the cost savings when there are no freight costs, no tariffs, and no storage fees. Overnight delivery also means better customer service and faster invoicing to customers.
A wise business owner prepares a comparative analysis that includes all the indirect importation costs in order to determine if buying goods at a higher price in smaller quantities within the confines of the U. S., can produce more profitability. This is an evaluation that every business owner should conduct periodically to guide them in determining the best resources.