While generously handing out samples or demos is a time-honored method to charm potential customers, they can impact your bottom line and skew financial reporting if not accounted for properly. The key is to ensure that these giveaways are reflected accurately in your books.
In this article, we’ll dive into the finer points of how to handle your free product samples and demos from an accounting perspective so you stay in the tax man’s good books.
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What is a Product Giveaway?
Product giveaways take many forms, including free samples to customers, demonstration models for retail locations, or promotional items for marketing events.
Though they serve as a cost for the business, they’re an essential investment for increased exposure and customer engagement.
An often-overlooked aspect to this strategy is the accounting and inventory considerations: how exactly do you account for the product that is being given away?
Examples of Giveaways
Before we delve into ways to account for giveaways and samples, let’s take a quick look at some common examples of product inventory given away to ensure we are on the same page:
- Cosmetics companies often provide free samples of new makeup or skincare products to customers walking by their counters in a department store.
- Food and beverage businesses may hand out sample-sized snacks or drinks at grocery stores, trade shows, or food fairs to introduce new flavors to the market.
- A company launching a new line of sports equipment could provide demo units of their products at related sporting events or retail outlets for customers to try before buying.
- During book launches, publishers might give away a limited number of free copies to reviewers, influencers, or at book fairs to generate buzz.
- A small furniture maker could offer miniature or sample models of their product line at local artisan markets or fairs to give customers a hands-on feel for the craftsmanship.
- Manufacturers of eco-friendly cleaning supplies may distribute trial-sized packages at sustainable living expos to encourage consumers to make a greener choice.
- A boutique candle maker could create limited edition scents available as complimentary tea lights during special promotional periods or holidays to kindle customer interest.
Your turn: Have a think and list out all the different situations you currently have in your business in which you need to remove an item from your inventory for zero cost.
Accounting Considerations for Giveaways
Time for a bit of accounting theory (don’t worry, we’ll try and make this easy to understand!)
Let’s begin with the basics: every pen, widget, or gadget given away has a cost associated with it, be it production or purchase cost (i.e. your business has incurred a cost in bringing this item into your inventory).
Classifying and allocating these costs correctly is a cornerstone of accurate accounting, ensuring that your financial data reflects the true cost of acquiring and maintaining customers.
As you give away stock, your inventory decreases just like any other regular product being sold.
It’s essential to recognize free sample and giveaway events as affecting your COGS. Properly accounting for these movements means you’ll have an accurate measure of cost versus revenue.
Read more on COGS here: How do I easily calculate Cost of Goods Sold (COGS)? The Guide for Makers
Your giveaways reduce your inventory value while also impacting your expenses. If not recorded properly, there can be significant disparities between your physical stock and accounted stock, leading to issues in financial statements.
The Role of Inventory Software in Tracking Giveaways
Managing product giveaways without a robust tracking system can lead to inaccuracies that could ultimately damage your bottom line.
Investing in comprehensive inventory software is a critical element of a successful giveaway strategy, allowing for real-time tracking, precise record-keeping, and insightful data analytics.
With inventory software, small business owners gain several advantages:
- Real-time Inventory Updates: As soon as a giveaway item leaves your storage, the software adjusts your inventory levels, maintaining an always accurate and real-time count.
- Cost Savings: By avoiding the overestimation of inventory, you can prevent overproduction or overpurchase, ultimately saving on costs.
- Valuable Insights: Analysis of how giveaways impact your stock can inform future production and marketing strategies.
Introducing Craftybase: Tailored for Small Manufacturers
Craftybase understands that small manufacturers need specialized tools to manage their unique inventory challenges. It’s designed to help track your material and product stock levels, calculate accurate COGS, and understand the true cost of your giveaways.
Try Craftybase Inventory and Watch Your Business Grow: Whether it’s for samples, demos, promotional items, raw materials and saleable product, see firsthand how Craftybase can streamline your inventory management.
Take our free trial for a spin today for 14 days, and take the first step towards a more organized and profitable business.
Giveaway Accounting: Frequently Asked Questions
How do I remove products from inventory that I use for personal use?
Any products that are used for personal use should not be included in your inventory. Instead, they should be recorded as a personal expense and not affect your business’s financials. It’s crucial to keep personal and business expenses separate to maintain accurate accounting records.
If using Craftybase to keep a tally of the value of items withdrawn for personal use, you’ll need to simply add a manual inventory adjustment with a category of Personal Use for the material or product each time you draw stock. Total adjustments made for Personal Use of materials can then be viewed on your Material Adjustment Report.
How do I determine the cost of my giveaways?
The cost of your giveaways can vary depending on factors such as production, materials, and labor. It’s essential to determine a consistent valuation method for your giveaways, whether it be the cost of manufacture or the retail price. This ensures that you accurately reflect the true cost of acquiring and maintaining customers.
How do I write off old non-sellable products (i.e. damaged goods)?
Damaged or unusable products should be written off as a loss in your inventory records. This means removing them from your stock count and adjusting your COGS accordingly. It’s important to regularly review your inventory for damaged goods and write them off promptly to avoid discrepancies in your financial statements.
Are there any tax implications for giveaways?
In general, the cost of giveaways can be deducted as a business expense on your tax return. However, it’s essential to consult with a tax professional for detailed guidance and to ensure compliance with tax laws in your jurisdiction.
How do I account for giveaways in Quickbooks?
To account for giveaways in QuickBooks, you can follow these steps:
- Create a new discount item: Go to List -> Item List -> New and select “Discount” as the type of item.
- Enter the appropriate name, tax code, and amount for the giveaway discount item.
- Apply the discount to sales transactions: When creating a sales transaction for a giveaway item, apply the discount item at 100% to reflect the free nature of the product.
For users of advanced versions of Quickbooks, see this article for more details.
As mentioned earlier, there may be tax implications for giveaways. It’s always a good idea to consult with a tax professional or accountant to ensure compliance with tax laws and proper reporting of your giveaways in QuickBooks.
The effectiveness of product giveaways as a sales strategy is undeniable. However, accurate accounting for these items is just as crucial. Smart record-keeping not only provides insights into cost-effectiveness but also ensures compliance and accurate tax filings. As a small business owner, stay one step ahead with your accounting practices and watch your business thrive, as you leverage the power of giveaways effectively and responsibly.
Remember, no financial detail is too small when it comes to the sustainability and growth of your enterprise. As the saying goes, take care of the pennies, and the pounds will take care of themselves. Keep giving, but keep counting too!