Understand that inflation can destroy your business. GAAP accounting rules (the rules that are followed in any accounting software) are designed to report financial results that are timely, reliable, and comparable. Cost-based accounting and matching costs to revenues are designed to create a system that recognizes actual company expenditures and produces consistent between periods.

GAAP accounting generally produces results consistent with the economic outlook for your business when prices are stable. However, GAAP account results can deviate dramatically from your company’s economic position during periods of inflation above 3 to 5%.

GAAP reports profit margins based on historic costs that may not accurately measure the value of your inventory during inflationary periods. This results in higher taxes and reduced cash flows. Product pricing must be adjusted to maintain profit margins over time to account for increasing inventory costs.  In addition, depreciation based on historical costs underestimates the future cash flow needed to replace equipment that your company uses to produce products.

The Statement of Cash Flows and other cash flow-based reports may give you a better picture of your company's production from an economist's perspective. #business #businessowners #taxes #inflation #inflationhedge