Dealing with Tariffs Uncertainty? What's your Action Plan?

Kevin Stewart from Crowe joins Boyd & Al as they delve into the challenges faced by accounting teams amidst tariff uncertainties. Discover insights on risk management, financial reporting, and strategic planning to safeguard your business.

#Tariffs, #Accounting, #RiskManagement, #FinancialReporting, #StrategicPlanning

Takeaways: 

1. Stick to your process and playbook amidst uncertainty.
2. Understand the impact of tariffs on suppliers and customers.
3. Evaluate contract terms and their implications on pricing.
4. Develop a plan of action to manage financial risks.
5. Consider the variability in pricing and its effect on revenue.
6. Build strong relationships with suppliers and customers.
7. Use scenario planning to anticipate potential challenges.
8. Collaborate with legal and finance teams for informed decision-making.
9. Define a playbook for consistent and disciplined decision-making.
10. Engage in open communication with stakeholders.

Chapters:

• [00:00] Introduction and Overview
• [01:00] Challenges in Accounting Amidst Tariff Uncertainty
• [05:00] Impact on Suppliers and Customers
• [10:00] Strategies for Risk Management
• [15:00] Importance of Contracts and Pricing
• [20:00] Scenario Planning and Forecasting
• [25:00] Building Strong Relationships
• [30:00] Conclusion and Special Offer

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Transcript

Al Frank (00:02.506)

Has Tariffs uncertainty put your company at risk? Maybe so when it comes to financial reporting. So much is riding on your team's process and plan. Are they ready? Some timely help for you next on the Savvy Supplier.

Al Frank (00:34.328)

Welcome into the savvy supplier where we save you time and money. I'm Al Frank alongside Boyd Evert CEO and co-founder of HRG. And with us today, Kevin Stewart, who is partner at Crowe LLP, one of the top public accounting and consulting firms in the world. Kevin, this may be what the most challenging year you've ever seen for accounting teams when it comes to risk and readiness and controls and everything else.

Kevin Stewart (01:00.146)

Well, honestly, think it's par for the course. It's just a different story for a different day, but it's the same thing. And so it's a good time to be an advisor. It's a good time to just apply the insights that we've developed over time. it's on the accounting advisory process. The processes generally can be the same if we can build the right process. And so it's just applying that to the times when it comes to uncertainty like today is.

Al Frank (01:26.954)

On an uncertain day like today, what are some of the judgments and the risks that they face, accounting teams and finance teams, as a result of all the tariffs uncertainty?

Kevin Stewart (01:39.64)

. It's just a new day. So with the administration comes some changes that they have. so with the surprises that are coming with the tariffs and the ups and the downs, it's really kind of sticking to your process, sticking to your playbook, whatever that is. And so with any uncertainty or any transactions that are occurring that you don't have,

certainty on or there's variability, is probably a better way to put that on the variability. Then how are you, what are your current processes and understanding all those parts that are impacting that specific transaction flow? And so if we think about, if we don't have pictures here, but if we kind of picture in our mind, our companies are kind of in the middle, right? You have suppliers before them, you have customers after them.

And so in each of those instances, you have transactions between you and the supplier, and then secondly, you have transactions between you and the customers. And the impacts are slightly different. So if we think through that a little bit, then with suppliers, the impacts on our financials is around its inventory or fixed assets, its contract modifications and getting those parts by which to build your consumer goods, by which then you're selling to the end customer.

it's it's potentially leases so it's like what are those specific transactions and then separately it's it's you know outside of that box of control you've got the geopolitical stuff where you've got you know the geographical things and so what are the things that impact that uh... and even the external environment of your financing or regulatory so regulatory would be the taxes geopolitical it can be the taxes that fit into that as well but the impact is really around

potential financing, right? And so I think with tariffs, if they're increasing significantly, in some instances, I think there was an announcement within the last week that some goods are being, you know, tariffed at 100%. That seems kind of high to me, right? So if your cost of your goods is doubling, then how does that impact the financing by which you're getting that? If you have a line of credit or if you have credit terms by which you're purchasing, then that's a significant impact that is almost an immediate change overnight. So again, how does that impact that? then

Kevin Stewart (04:03.244)

maybe even more so beyond that is to the customers. Those transactions and how that impacts that team and you is really around your revenue. So do you have the protections in your place, in your contracts? Do you understand your contracts well? And so, part of the conversation we had last time is be in that lighthouse. And so, with an accounting and finance team as it relates to tariffs, it is understanding what you have and if something changes, what lever does that pull? What is the end impact?

And so if tariffs are a hundred percent, that doubles the cost of your cost of goods sold. Does that, are you able to pass that along? Are there agreements in place with your end customers by which you can change that? are you absorbing that cost? And so it's, so when you boil it all down, when you come back to it, right? And this uncertainty, the way that you get through uncertainty is you have standard processes. You have a logical flow by which you approach things. You have a logical approach.

When this happens, you know, A then B then C type things, and you should just be going down the line. So I'm kind of crossing off. Not significantly different than honestly, maybe five years ago when we started going through COVID and there was such supply chain disruption. There was such disruption and at home around leases and office space and you know, what can you pay and what can you afford to pay and negotiations. So I think it comes down to it's defining your playbook by which you're approaching.

knowing that if you're dealing with a country where there potentially could be significant tariffs, it's knowing that, it's thinking about that ahead of time, and then it's having a plan of action. And that plan of action gives you a little bit of certainty. You can't control what's outside of you, but you can control what's inside and how you're going to approach things. And it's negotiating in advance as well, I believe, to make sure that everything is flowing appropriately.

Al Frank (05:56.142)

Well, I would imagine that at the beginning of 2025, there were quite a number of products started off with one country of origin and along the way shifted to another country of origin, maybe even multiple countries of origin. And the percentages of tariffs might have changed a number of times during the year. Any suggestions for accountants on how to account for all those changes in 2025?

Kevin Stewart (06:19.193)

Well, mean, none of that is happening overnight, right? Those are, those are business decisions being made, you know, based on operational considerations or cash considerations, but you're not switching up, you're not switching flow through countries within a day, right? That's taking not even a month. It's probably months at a time or even six months kind of down the road. And so those, those are pretty shifts. I think so from an accounting and finance team, it's advising.

It's, it's, it's serving it. If you're a controller, if you're a CFO, you're advising the rest of the business of this is the impact of these decisions from a financial perspective. Um, many times in my background, when I was, when I was in industry, um, in working for the companies that I work for, the business owners would have an idea of this is what we want to do. And this is how much revenue we're going to get, think, you know, we're going to get from that. And then like, we'd have to pump the brakes is like, let's, let's consider the actual transaction itself. What does the contract say?

You think you're getting a million dollars in revenue, but when you back into it, you know, based on guidance, accounting guidance gap, you know, general accepted accounting principles, you don't actually capture as much revenue as you think in the time permit you're thinking in. And so it's because it's matched over time and there are principles that they kind of go through that. So with, with the changes in origins and how the country's things are flowing through or what they're changing to again, it's not happening quickly.

It's unlikely that it's happening quickly, right? And so you have time to prepare. it's it's a lot of times it's slowing down, even if it's just slowing down mentally to let's not be rushed. Let's work through this. Let's work diligently. Cause you want to do it right the first time. You don't want to waste time. You want to be efficient, but you want to work through things in a pragmatic way, a practical way to kind of get back to the best solution to advise. Sometimes that's hours. Sometimes that's days.

Sometimes it's a couple of weeks are really evaluating what's going on. and it's kind of getting there. So to me, it's a friend of mine told me a story years ago when he was a small kid, his, his grandfather was, he was using dynamite to blow out a stump on us on this farm. And one of the things he advised him was, well, as soon as they're getting ready to do it, my, my friend, Greg was getting ready to take off running and his grandfather told him, you know, it's actually, it's safer to walk.

Kevin Stewart (08:43.853)

Right? So they get the dynamite in place, you know, they set the fuse and then they just turned around and proceeded to walk quickly, but deliberately away versus running. And what that does, you know, when I, when I reflect back to what actually apply that in my own mind, you know, with, with clients at times, and it's like, we don't have to be rushed for the sake of rushing and actually rushing can create more danger. And so in that it's like, that's, that's B practically through pragmatic let's have plan and we're going to get there and we can get there.

deliberately, quickly paced, but not putting ourselves more at risk because we're rushing through decisions.

Al Frank (09:23.166)

You wanna jump in there, Boyd?

Boyd Evert (09:25.496)

There's a lot to jump into. Yeah, so we were just talking earlier about multiple sourcing. So one of the impacts that I've seen and we see here at HRG is you'll end up having an average cost of inventory. And a lot of retailers don't like that, right? They know what is the price? Well, but if you're getting sourcing it from multiple places, have multiple costs, right? That has an impact. So one example that comes to mind is

Kevin Stewart (09:28.397)

You

Boyd Evert (09:55.105)

One of our clients is in the air conditioning and dehumidifier space. So there's some seasonality to it. So what they do is they push in a lot of their orders that are fulfilled coming in from China. And then as there's reorders, those are sourced domestically, right? So that they often will stage it in Mexico and then fulfill it that way. when you're dealing with returns, well, what is the cost of that item? Was it sold to the retailer at the lower import cost or at the higher cost?

of some of these analyses that we've had to perform have taken several weeks just because you're trying to untangle that and trying to show that, you know, where the average cost of inventory was at the time. that's just another layer to this is I think understanding the cost inputs that go into your inventory and you're using FIFO or LIFO, we're usually FIFO, right? But you need to have

I think companies that aren't used to doing that, right? So the companies that we're dealing with, especially where there's seasonality, where you can leverage China to push in that initial order and then manage it through domestic orders, those companies that are used to it, think the ones that aren't, those are the ones that are going to be facing some challenges.

Kevin Stewart (11:11.052)

And Boyd, when you're working through that, I does that go back to the contracts and the agreements between the company and whoever the end user is?

Boyd Evert (11:17.876)

Yeah, it does. And of course, I'm sure you're well aware that all of the vendors slash supplier agreements are heavily in the favor of the retailer. And they're always talking about we it's the most favorite nation status, right, that they get the lowest price you're selling. Well, that's tricky, because you could end up still be pushing in those import orders. At the same time, maybe there's some some orders that are being fulfilled domestically. Right. So technically,

the domestic orders, well, they could argue those should have been sold to us at the lower import cost. So yes, I mean, there is knowing that agreement, but also understanding that the merchants, the buyers aren't usually very savvy when it comes to accounting. And a lot of times, you know, when we send a spreadsheet over, they'll want a PowerPoint instead. So I think some of that complexity that is going to impact that relationship. then, of course,

downstream, you've got post audit coming in and they're, you know, really slavishly enforcing that vendor agreement and in some cases distorting really what the original agreement was.

Boyd Evert (12:54.178)

 Forecasting, right? So when you have an item that's really subject to price elasticity, right? So any movement's going to have an impact on that forecast. Those are the scenarios that I'm curious about because if you end up having a pretty bullish forecast and then the tariffs come along, you know, how

How much do you pull back from that? In some cases, like we're seeing these absurd cases of 100 % in the tariffs or 50%. No one's ever had to manage that. And so just one example is when you're doing a promotion, usually the supplier saying, I think we'll have a lift of 8 % or 10 % in demand during this promotion. So this is what we think the orders should be.

prior to the promotion and during the promotion. But the price moves are usually in single digits, maybe low double digits, not triple digits. You know what I mean? So I'm just curious from your standpoint, Kevin, when you have something that is so far removed from the reality that we've been dealing with the past 20, 30 years, how do you manage those risks and forecasting?

Kevin Stewart (14:22.123)

That's a great question that I'm not sure I have a great answer to. mean, really, when we talk about the elasticity, the term that I would use within accounting is variability. And if your pricing is based on variability, then it's very hard to capture that within revenue or kind of the impacts of the impact on revenue through discounts or how are tariffs allowed to be passed on at the agreed upon price. Is that the agreed upon price, regardless of the cost that's kind of coming into it?

So it's understanding that. So the variability is so significant. I'm not familiar with the time recently. I've been in energy, I've been in retail, I've been in some other places. I don't know if there's been an instance in my lifetime where we've had this much flexibility or variability within pricing. Now in saying that, I think it's taking conservative approaches. So if we think the forecast is gonna be...

8 % now, maybe that needs to be higher, maybe that needs to be lower and baking in some basically risk into that. Generally, think it's in forecasting within retail, there is a risk consideration, but that risk consideration likely needs to be much, much higher. It's scenario planning, know, scenario A, scenario B, scenario C. And it's a little bit, it's reading the tea leaves. It's like, what is going on? So it's having a good

economist or economist information. Within our firm, have a piece of our firm called ITR and they are very focused and they're very studied on kind of the economic impacts on pricing, the economic impacts on selling of a company, those types of things as well. So it's probably getting additional information that you have today and kind of what direction are we leaning. And so I think it's considering the risk. It's developing probably closer relationships.

with the individuals you're selling to and the individuals you're buying from and trying to partner as much as you can together because the impact frankly is the same on each of us and it's sharing that risk and then sharing that burden. Understanding that, understanding you don't always have that ability, not everyone wants to play nicely within the same sandbox and yet at the same time we're a little bit in a time where we need to share some of that risk as professionals.

Kevin Stewart (16:42.674)

So if we come back to that, really it comes down to it's considering risk in that pricing and that variability. It's somehow baking that into forecast to at least consider. You're not going to get it right. You're not going to about a hundred percent. You may not even about 50%, but you may about better than kind of what you're doing now because it's not the same old, same old.

Boyd Evert (17:00.792)

And we're seeing some of the changes too in the guidance that's being issued. A few companies have just removed guidance altogether, which that's some unchartered water there as well. Usually, they're able to offer some guidance to Wall Street. And when you do that, you have to believe that the price variability is such that there's no way they can issue any guidance. Maybe it would be like a daily guidance just tracking with the news, but that's too confusing.

Kevin Stewart (17:28.678)

Yeah. Yeah. And I would agree on that. You know, if it's a public company providing guidance on a quarterly basis, but if they think that guidance is actually bad guidance and they're irresponsible to share it. And so it's, it's abnormal, you know, but I would say our times are a little bit abnormal when it comes to variability and pricing. And so I do think that, that, tells a lot. And I think that there's some responsibility there by that investment, you know, relations team who are attempting to share good guidance to, to, to others. And so, yeah.

Boyd Evert (17:39.928)

Right.

Kevin Stewart (17:58.671)

It's if you can't reasonably estimate, then you can't reasonably share. And so it is, it is a difficult time in that regard.

Kevin Stewart (19:18.284)

it's probably more of an accounting topic, but you know, with the increase in pricing, there are impairment considerations is when you increase the, if you increase the cost of something by double, are there any buyers out there for those goods? And so that does, it could create the impact that frankly, it probably creates some going concern issues for certain companies. Do they have the ability to continue because are there buyers for their goods at five times, 10 times, whatever, a hundred times kind of the rate.

Boyd Evert (19:32.354)

Hmm.

Kevin Stewart (19:46.727)

I don't know if we want to cover that necessarily. It's kind of nerdy topic, but it's relevant.

Boyd Evert (19:50.585)

Well, I think it would relate, it possibly would relate to in retailing clearance, right? We can't move these items, right? Or we've brought in some product and it's sitting in the warehouse, right? And anticipate, right, because of the just in time inventory, this is breaking that, right? Because you had a bunch of people pulling stuff in early, right, ahead of the tariffs. Well, now they could be sitting on stuff where there's not

The demand is soft and I think there's some concerns about Black Friday. But yeah, we can back up and take that in. So I'm just thinking we can look at it from several vantage points,

Kevin Stewart (20:28.263)

Well, it's with that specifically, it's, you're still paying, assuming you didn't pay cash, but even if you did pass, you're, you're, you're paying interest on something you may not be collecting on. And so that cost is continually increasing each week, month, day, or whatever it is that that's kind of getting here. So it does significantly impact cashflow and the ability to maintain or manage your own debt.

Al Frank (21:08.364)

And thinking from a retail supplier's point of view, is there an enforceable right to have price increases passed along to the consumer?

Kevin Stewart (21:21.67)

really boils down to the contract. It really does. so you have contract.

Boyd Evert (21:23.657)

Yeah.

Well, and also the buyer too, right? mean, because the buyer could be slow to pull the trigger, right? So you can have it in writing, but if you don't, if you have a bad actor that can really blow up your business. But I'm sorry, Kevin, go ahead.

Kevin Stewart (21:40.846)

I had something brilliant there to share and boy did you screw it up.

Yeah, but it does come down to contracts and it comes down to who you're negotiating with or who you're doing business with. I think sometimes there's a, I'm working with clients, I try to understand their pressures and you know, and sometimes you have clients that respond sometimes unprofessionally or rudely or whatever, but I try to back into our, pressure are they specifically feeling, know, whether it be protection of their own job.

you know, trying to protect their own company, trying to survive kind of all those things. And so there, there are those pressures that buyers and retailers are feeling and not just the company as a whole, but the individual buyers and business people you're dealing with. there are pressures are feeling that you just don't see professionally and personally, you know, kind of considering that. But separate, if you take out the, emotional human aspect of it, it comes down to contractual agreement.

And it's both, and I think, Boyd do you see that in your business frequently. when, when companies are dealing with, with retailers and users is the, you've got the written form of the contract, and then you have this human understanding of the contract. This was the intent. And from an accounting perspective, I'm just like, well, the contract says this, I can't read intent into the contract. We can consider it as I'm advising you and kind of going back and getting clarity on the contract.

But if there's not clarity in the contract, then that allows for human interpretation, which leads to who's of most advantageous to. So now with you, if you have the ability, now would be the time to really consider what are the terms of your contracts by which you're writing and what are the things you're adding in? And if you're giving something up, what are you giving in return? Again, if you have that power, right? I know certain retailers, companies have much more negotiating power than others and.

Kevin Stewart (23:42.885)

You know, suppliers sometimes are very dependent upon certain retailers to buy their goods and they're willing to take on some risk. But at the same time, and I think we discussed this last time a little bit, it really does come down to contract terms. And so to the extent that you allow variability in that contract, it creates complexity and the complexity creates a lot of risk and the risk creates potentially a lot of pain kind of in the future. So the more that you can define that upfront.

and it's just agreeing upon that I think it's the most beneficial. And so now we're probably paying the consequences of those agreements we've had over the last years and months or years. So in addition to kind of, you know, identifying the sins of the past or the agreements of the past, it is going forward. We can't have this risk or uncertainty kind of going forward. So to the extent that you can clean up your contracts and your agreements, even your financing agreements.

 I think now is the time to do that because we have at least three and a half more years of what seems to be this, this playbook by which our administration is using. And hopefully it all plays out well, but in the short term, there's some pain there. And so I think back to the, movie and Boyd's probably going to laugh, you know, Al may laugh if it's a good day, but it's a, there's a movie called days of thunder with Tom Cruise. know, I'm not a huge fan of Tom Cruise, but the movie's good.

It's entertaining, but there's a scene in that where he's a race car driver and he's driving through and there was a wreck in front of him and also he can see a smoke. He can't see the cars. He can't see through the smoke. He doesn't know if he enters into the smoke, if he's going to have a wreck again. And he was recovering from a wreck mentally. And so he's talking to his crew chief and the crew chief says, choose a hole and drive through it. And, and I I've used that in my life. I've used it in my work when things have been certain.

And I just try to see through the smoke and I choose to, driving through that hole, right? I'm choosing a plan. That's the whole, I mean, I'm being confident as they do it, you know, considering a risk of driving through that hole. think in a very similar way here with all the uncertainty and all the smoke in the air and just not knowing what to do. I think it's choosing a path forward. It's choosing a path by which, you know, we're going to be confidently doing this and then allowing yourself, if you need to shift, you shift and you choose a different hole. But I think the action right now is the action plan or.

Kevin Stewart (26:09.817)

the game plan should be, understanding what's in your contracts, what are the negotiabilities, and it's considering all those factors, even point of origin. Do we need to shift that and understand the consequences? So I think in doing that and choosing that hole to go through the smoke and in choosing your plan, it does give you a plan to kind of move forward as a team. And I think there's value in that.

Al Frank (26:34.476)

So you're choosing the hole to go through the smoke. How often do you bring the legal team in to help you discern that?

Kevin Stewart (26:41.678)

Well, I think it's that's part of that process. And so if your team is working together, well, right, you've got your accounting and accounting and finance team, you've got your legal team, you've got, you've got your operations, you've got your, your, your, your CEO, your CEO, you've got all that team together. And it, it doesn't necessarily mean you're having this huge meeting and a conference, you know, around this, you know, this oak boardroom where you're smoking cigars in the old days and you're talking through things that really is.

It should be, again, it kind of goes back to a process. So it is bringing in legal, are our options, what are our flexibilities, what do we want to add in, what do we want to take out? And I think legal teams are great. Sometimes they have more complexity than needs to. So then there needs to be a level head. Finance sometimes offer that. Sometimes it's the, know, the owners leadership, it's the board. Offering that level head is like, understand the risk. Thank you for advising that. Here's the decision we're going to make.

So every team member has a part, that finance team has a part, legal has a part, operations has a part. And it isn't just about the immediate sell. It is about the relationship. It is about building a profitable practice and business and kind of moving forward. And that takes a collaborative team and being do that. So it is having those individuals on board or individuals like yourselves or outside attorneys or outside advisors like myself, and just helping companies get the best answers.

in making the decision. But I think once they get the playbook down, right. And there's a lot of times with developing companies, they're developing a playbook and they're making a lot of mistakes and trying to get to the right answers. But I think once they get the playbook down, then there is just, it's just, it's natural business. It's the natural course of action by which to get there. And if we go back to the original conversation that we were having is like, how do you build a stable process and kind of this ever changing or variable environment? It is exactly that. It is having a playbook by which you approach it.

whether it's in sports, whether it's in life or whether it's in business, whatever else, the more experience you have kind of doing the, if you're making right decisions and if you make enough right decisions, then it becomes part of who you are making those right decisions. But those right decisions are usually based on discipline. it's, if you have the right disciplines in place and you're making the right decisions, then it generally leads to good things. Now there are absolutely things outside of your control, but all you can do is control what you can control.

Kevin Stewart (29:03.299)

I think defining that playbook, that action playbook, I think is critical in getting there. And for me, I'm always about open communication, direct conversations, direct feedback. And so that's having conversations with suppliers, it's having conversations with order of else, and with the hope and the intent that everybody's negotiating with the right frame of mind, but also clearly understanding that you have a few bad actors here and there.

Al Frank (29:27.714)

Kevin, if someone does want to reach out to you, how can they contact you at Crowe?

Kevin Stewart (29:34.037)

Kevin.Stewart at crowe.com is my email address. You're more than welcome there. I'm also on LinkedIn. If you just Google, know, we use my friends Google Crow and Kevin Stewart, accounting advisor, or Crow even and Kevin Stewart. think I'm the only Kevin Stewart here. You'd be able to connect with me. I do post off and on frequently on LinkedIn on different topics around closed processes, accrual processes, and leadership in general. Always happy to engage in a conversation.

Boyd and I are presenting at a few different conferences here in the upcoming future. And if you're happy to be there, I'd love to have a conversation with you. And I can always be a phone a friend, you know, so feel free to email and be able to connect.

Al Frank (30:17.698)

You've always got great information. Thanks so much for being with us today.

Kevin Stewart (30:21.794)

Very good. Well, thank you all so much for the opportunity and look forward to doing more of these.

Al Frank (30:26.712)

Well, as we wrap up today, HRG has a great special offer for you. You can contact us now at HRG-Audit.com and we'll do a free tariffs risk analysis for you. We'll give you key insights on three things. Identifying your risk exposure to tariffs, assessing your financial impact from tariffs, and suggesting mitigation strategies to help you shield, to help shield you from the impact of tariffs. Just one more way that HRG can save you time and money.

HRG, wiser decisions, fewer deductions. See you next time on The Savvy Supplier.