Adding and Managing Inventory for Revenue Stream

Many service-based businesses don't have any inventory, because they only offer services. For example, an attorney's office doesn't have any raw materials or completed goods in stock. They just do the work and then bill for their time.

A product-based business, on the other hand, needs inventory. A furniture manufacturer must purchase raw materials to make its products. Then the finished products are held as inventory until they're sold to customers.

Inventory purchases and sales play a major role in your company's cash flow, so an inventory calculator helps you plan for income and costs.

Beginning with direct costs:

If you're using the Inventory calculator, you'll want to pay special attention to the cost of sales or direct cost entries in your forecast. In a product-based business, The system works on the assumption that your cost of sales is all "costs of goods sold," or the cost of producing your product. (That excludes Direct Labor costs, which are not calculated into your inventory.) So the Inventory calculator begins its calculations with the totals in your Cost of sales entries of that revenue stream.

If you're not sure that all of your Cost of sales entries are inventory-related, you may need to update some of them. For more details, read What is the difference between direct costs and expenses?

Enabling inventory tracking:

1

In your financial forecasting tool, locate and click on the 'Settings' tab. This section allows you to manage various configurations of your financial model.

2

Inside the Settings tab, look for the 'Inventory' subsection and click on it. This action will direct you to the inventory management area.

3

You’ll see a list of revenue items that you have previously set up under the revenue configuration. Each revenue stream will have a toggle switch next to it.

To activate inventory tracking for a particular revenue stream, simply turn on the toggle switch for that stream. You can then set specific inventory parameters such as 'Days to keep on hand' and 'Minimum inventory order.'

After activating the toggle, enter the details for inventory management, including how many days of inventory you want to keep on hand and the minimum order quantity. These settings help ensure you never run out of stock but also avoid overstocking, which can tie up your capital.

4

Days to keep on hand: Then adjust the first setting, which is Days to keep on hand. This is the number of days of inventory that you want to keep in stock. The system will use your cost of sales to calculate the right amount for each period. When the cost of sales has accumulated to a point where you have less than the minimum amount of inventory on hand, The system will forecast a re-order. That purchase will appear in your Balance Sheet and Cash Flow.

NOTE: It's generally smart to keep your inventory to the minimum that you need since buying inventory means tying up cash that could be used for other things. Many businesses carry too much inventory, and that hurts their cash position.

5

Minimum Inventory Order: The second setting is the minimum order size. When you need more inventory, it automatically builds an order into the Cash Flow. But, if you are only a dollar short of what you will need, you probably don’t want the software to plan on ordering a dollar of inventory. Suppliers typically have a minimum order size. So, this setting establishes the minimum order size, which ensures that any new orders are always for a reasonable amount.

Enter the desired minimum order, and then click on save to apply it:

NOTE: If your cost of sales exceeds the amount of remaining inventory you have on hand, The system will calculate an inventory order that is either the amount you need to cover your current sales or the minimum purchase amount you specified, whichever is larger.

6

Once you have configured the inventory settings for your chosen revenue streams, click 'Save' to apply the changes. This will update your financial forecasting model to reflect these inventory parameters.

The Basics of Inventory Calculation:

Inventory management helps you keep track of how much stock you have at any given time. It ensures you have enough goods to meet customer demand without overstocking, which can tie up your money.

Basic Inventory Calculation: The formula used to calculate inventory is simple:

End of Month Inventory=(Starting Inventory)−(Used Inventory)+(Purchased Inventory)

Example Scenario: Let's break this down with an example:

Starting Point: You start with 0 inventory and expect to use $1000 of goods each month. 

Initial Purchase: You decide to keep 3 months’ worth of sales in inventory. If you expect to use $1000 of goods each month, you initially order $4000 worth of inventory.

Month 1 Usage: By the end of the first month, you've used $1000 of your inventory, leaving you with $3000.

Month 2 Planning: In the second month, you use another $1000, reducing your stock to $2000.

Reordering: Since $2000 is less than three months of stock, The system triggers a reorder. You set a minimum reorder amount of $1500.

End of Month 2: You receive your reorder, so your inventory at the end of Month 2 totals $3500 ($2000 remaining + $1500 new stock).

This approach ensures you always have enough inventory on hand, based on your sales forecasts and settings, while also managing costs efficiently.

Where does this entry appear in the financial statements?

An inventory doesn't appear in the Profit and Loss table, but your cost of sales does, and these form the basis of inventory calculation.

In the Balance Sheet, the value of your inventory is shown for each month or year, calculated according to the basic formula of inventory calculation:

In the Cash Flow statement, you'll see a "Change in Inventories" line, showing how much inventory value the company gained or lost in a particular period. This number is based on both the amount of inventory your company has purchased and revenues from inventory sold, in that period. The resulting number is a net change, as shown below:

You can also refer to the separate inventory report to check the inventory.