Managing Inventory Drives Cash into Your Business

The health of a business is dependent upon cash flow. So you need to be conscious of ways of using funds more efficiently.

Owning a business that carries inventory for resale presents special challenges. Inventory items drain your cash, but managing inventory for resale actually drives cash into your business.

Use financial information regularly to monitor your inventory levels. Your optimal amount of inventory is just enough on hand to meet customer demand. The secret to managing this successfully is by measuring inventory turnover. This is the ratio of your cost for items sold from inventory to the cost of inventory on hand. Put another way, divide cost of goods sold by current inventory: If you sold widgets last month that cost you $300 and you paid $100 for widgets on hand, your inventory turnover is three times per month.

This measure is only reliable if your accounting separates the cost for inventory items from any other category within cost of goods sold. Ideally, you want a breakdown of the cost of goods sold and the current inventory figures for each item your business sells. Downward-creeping inventory turnover is a signal you need fewer items on hand to meet demand.

Of course, occasional physical inspections are necessary to ensure that inventory figures are accurate. Count the number of units in an inventory item category and multiply by the cost per unit. This is tedious work, but you can always hire a service to do it.

A bookkeeping entry corrects your financial statements to match the inventory count.

DIY: Learn to Use Your Financial Statements

If you want to glean valuable information from your financial reports, you need to get your hands dirty. And that means compiling details yourself. By becoming involved in the data entry process, you can better see the inner workings of financial reports.

You don’t need to “do the books” manually or create full financial statements. But you should understand what those recorded transactions mean and how your financial statements work to provide you with information you need to make decisions. Here are the steps to follow:

Mental preparation

Your journey into the world of bookkeeping only transports you a short distance; your objective is more like understanding Dr. Seuss than conquering Shakespeare.

Rather than fearing the subject is too complicated, take an interest in learning basic bookkeeping rules.

It’s like studying up on a sport you want to appreciate as a spectator; you don’t want to play the game yourself. Focus on your goal of discovering how the figures deliver the true health and state of your business.

Tools

Find a helpful resource that explains the basics of bookkeeping in plain language. Many books tie together the essentials in a short format that’s easy to remember. Help is also available from friends or online articles, and of course your accountant is a valuable source of information.

After learning how a business transaction is recorded, you can begin to record one yourself, starting with a very low-tech system – the old-fashioned pencil and paper.

Once you fully comprehend the basics of the manual system, you can advance to computer programs. But note that accounting software does not do the work for you; these platforms only produce an output of reports based on your accurate input of transactions.

Following the procedure

Doing simple transactions is sufficient to teach you how they are summarized on financial statements. Make sure you know how to record a basic sale: Money comes in on one ledger and income is recorded on another ledger. Next, pay an expense: Cash goes out on one ledger and expenses go up on a different ledger.

Make things a little trickier by adding accrual accounting to the picture. Record a sale for which you invoice today and receive payment later. Try an expense in which you are billed now and pay two weeks later.

After each step, watch to see how your transaction shows up on the financial statements.

Summing up

By becoming involved in the data entry process, you can uncover errors. You also begin to see opportunities for analysis.

Accurate records that speak to you allow you to improve spending decisions, conduct better budgeting assessments, manage cash flow and monitor what’s owed to your vendors and due from your customers.

Providing a great product or service and winning customers is only part of a business owner’s mission. The difference between working hard and working efficiently is clearly revealed in your financial statements.

Grasping the steps that go into producing statements gives you the ability to extract from them useful and profitable information.

Managing Inventory Drives Cash into Your Business

 

The health of a business is dependent upon cash flow. So you need to be conscious of ways of using funds more efficiently.

Owning a business that carries inventory for resale presents special challenges. Inventory items drain your cash, but managing inventory for resale actually drives cash into your business.

Use financial information regularly to monitor your inventory levels. Your optimal amount of inventory is just enough on hand to meet customer demand. The secret to managing this successfully is by measuring inventory turnover. This is the ratio of your cost for items sold from inventory to the cost of inventory on hand. Put another way, divide cost of goods sold by current inventory: If you sold widgets last month that cost you $300 and you paid $100 for widgets on hand, your inventory turnover is three times per month.

This measure is only reliable if your accounting separates the cost for inventory items from any other category within cost of goods sold. Ideally, you want a breakdown of the cost of goods sold and the current inventory figures for each item your business sells. Downward-creeping inventory turnover is a signal you need fewer items on hand to meet demand.

Of course, occasional physical inspections are necessary to ensure that inventory figures are accurate. Count the number of units in an inventory item category and multiply by the cost per unit. This is tedious work, but you can always hire a service to do it.

A bookkeeping entry corrects your financial statements to match the inventory count.