10 Ways Inventory Management Can Make or Break You — Part III
Many apologies, seems I forgot to post Part III of our white paper — 10 Ways Inventory Management Can Make or Break You — last week. Part II discussed the various costing methods — LIFO, FIFO, Weighted Average and Standard Cost — and the impact they can play on your balance sheet, income statement and cash flow. Read Parts I & II.
Part III tries to impress upon you the importance in knowing “where your cash is.” It is more than simply looking at your bank statement. What you really need to know is how much of your inventory is paid for, which items you might still owe some money on, and whether all your customers who have purchased items are paid in full. This will give you a true picture of your cash-flow.
Part III: Where is Your Cash?
Inventory is a liquid asset that heavily influences cash balances. Most businesses are careful about monitoring their cash, and keeping track of how much they have. However businesses that simply rely on their balance statements from the bank to assess their cash flow put themselves at risk if they carry large amounts of inventory. For example, you may know the value of your assets in inventory but do you know how much of it you have paid in full? Do you know how many customers have been sold items from inventory that have not yet paid you? The answers to these questions can dramatically impact your cash situation and your bank statements.
A bank statement might show that you are selling and from all appearances your business is healthy, however the reality is you might find that all your available cash may be tied up in inventory when bills come due or you’re waiting for customers to pay. A large number of businesses that appear profitable end up going out of business because this is often the root of their problem. With a good Inventory Management System you can institute the necessary tracking and controls you need to avoid this from happening.
One solution is to integrate a purchase order process that tracks any inventory purchase order as soon as it is authorized. Then use this information to evaluate how much cash you’ll need to pay for the purchases when they come due. In addition you can better track when items are received and placed in inventory. Although you may not get an invoice until all items are received, you can record their value based on the order as they come in.
A good inventory tracking system can immediately and accurately reflect sales to see what revenue you are generating along with the items sold. In addition, this information can be reviewed to estimate when you can expect to receive payment.
Similarly if a business has a greater amount of cash on-hand they could cover bills and remain in business, even if the revenue didn’t come in on time. Regardless having the ability to track your inventory sales revenue as it relates to what is still owed to you as payment for the inventory or what you may pay out in inventory is critical in determining your business’ actual cash balance.
A General Ledger Report — Cash-flow Statement
Read the full white paper in its entirety — 10 Ways Inventory Management Can Make or Break You.
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