LIFO... what is it?
OK, you know LIFO is an acronym for Last In, First Out accounting. But did you know it is a great source of additional cash for your business? Read on -- your business depends on it!
All businesses need more cash. You won't find a business owner anywhere who will tell you he has too much cash. Unfortunately, it's not easy to produce more working capital from a well run business. That is, until you consider LIFO. By electing LIFO, you can reduce taxable income and pay less tax. The tax you save becomes cash in your pocket. With LIFO, you can benefit from inflation, high inventories and high tax rates. LIFO uses these negative events to build a fund of cash which can be used by the business as it pleases for as long as it wants. When the time comes to pay back the fund, no interest is due. The profit is left for the business owners! Best of all, a LIFO election won't interfere with the ordinary course of business. Nothing changes but the way you report income. All companies need the best tax benefit available - LIFO accounting.
Here's how it works: In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO Reserve account on the books. The LIFO benefit grows as inflation widens the gap between current year and past year (minus inflation) inventory costs. This gap is the LIFO Reserve. The tax savings from the yearly deduction can be invested separately or re-invested in the business. Either way, the investment becomes a profit center to you!
Example:
With LIFO |
Without LIFO |
|
| Revenue | $35,000,000 |
$35,000,000 |
| Cost of Goods Sold | $30,000,000 |
$30,000,000 |
| Operating Expenses | $1,500,000 |
$1,500,000 |
| Operating Income | $3,500,000 |
$3,500,000 |
| LIFO Adjustment | $600,000 |
$0 |
| Taxable Income | $2,900,000 |
$3,500,000 |
| Income Taxes @ 35% | $1,015,000 |
$1,225,000 |
| Cash Flow | $2,485,000 |
$2,275,000 |
| Extra Cash | $210,000 |
$0 |
| Increased Cash Flow | 9.23% |
0% |