Service Companies Need to Record Inventory, Too

Accurate inventory accounting is vitally important to companies in the business of selling products. But its importance should not be overlooked by small service-oriented operations.

An entrepreneur billing for a service may scarcely realize that some element of the work entails items acquired and resold, such as parts and components installed for customers.

Costs are subjected to inventory accounting when they comprise expenditures to purchase or manufacture resale items, as well as outlays that make products ready for sale-as in retailers who purchase items from suppliers to resell later to customers.

Whether the business is a big box store or an individual marketing products on the Internet, the circumstances require the recording of inventory.

As examples, consider the IT consultant who installs devices as part of the service, the home healthcare provider who procures durable medical equipment for patients, or the plumber or master electrician who is expected to have on hand those items that are sold with a service.

Things bought by all of these business people for their future projects are held as inventory. Inventory includes items such as routers and switches stored by the IT consultant; walkers and medical monitoring devices stockpiled by the home healthcare provider; the plumber’s pipes; and the HVAC repairman’s air conditioner parts.

Costs for inventory are not expenses; inventory appears on the business balance sheet in an asset account. As items are taken from inventory for sale to customers, their cost is transferred to the expense category for cost of goods sold.

Hence, accurate inventory accounting ensures correct reporting of profit on the income statement. Incorrect inventory accounting leads you down the primrose path, skewing your perspective on profit and cash flow. This becomes an ongoing problem because ending inventory for the current accounting period automatically becomes beginning inventory of the next period.

Businesses with multiple inventory items and high costs generally rely on computer programs for tracking. The significance of this procedure is that it ensures that sums are not lost in the confusion of constantly changing unit costs due to price inflation.

As a general rule, the oldest items are removed first when sold. The result is inventory valuation using the most recent costs.

That said, many small operations have no reason for fancy approaches to inventory accounting. An inventory with low costs or few items doesn’t require a computerized perpetual system for tracking acquisition costs and reductions upon sale.

Instead, a business should record acquired inventory in an account called “purchases” that is adjusted at the end of an accounting period-monthly or annually.

Under this periodic system, the cost of ending inventory is determined by a physical count or an estimate. When an accountant subtracts ending inventory from annual purchases and adds beginning inventory, the result is costs of goods sold.

A small business owner who marks up inventory items by a certain percentage can estimate the cost of goods sold as a percentage of unit sales. Ending inventory is therefore the beginning inventory plus purchases, minus cost of goods sold.

Try These Easy and Quick Fixes to Improve Cash Flow

Even the most inveterate planner may overlook the everyday processes required to maintain a small business’s cash flow. That means that, however well you plan, there may be better processes and practices you can put in place to ensure your success.

Speed up payment

Maintaining healthy cash flow is less challenging if you introduce some tried and true measures into your operations. Speeding up collections is an obvious starting point, but surprisingly, many entrepreneurs don’t invoice immediately upon completion or delivery, with the result that payment is delayed.

Focus on timely invoicing, and your wait will be shortened. By offering discounts of 2 percent to 5 percent-particularly on large orders-you can encourage faster cash inflow. And if your customers provide you with credit card information, you can set it up so they will automatically receive their invoice balance on their card when it’s due. Plus you’ll save money on printing and postage.

Paying your bills

When it comes to your own bills, you can maintain cash on hand for financial emergencies while still ensuring you pay your bills on time with online bill payment systems. Simply establish automatic payments by credit card on bill due dates. Also consider using a cash rewards card for all your purchases. Lastly, you would do well to take advantage of the 30- to 60-day grace periods offered by many suppliers. By paying attention to these quick and easy fixes, you’ll make your cash flow healthier. It’s one more step on the way to success.