Inventory is product you buy to resell, so yes, it affects your cash flow. You spent money to purchase it. You collect money when you sell it.If you are preparing Cash Flow Statements, you’ll show inventory purchases as a cash outlay.
Inventory purchases are not a regular expense. The money you spend to purchase it does not go on your Profit and Loss Statement. (Want a refresher on the P&L? I explain more, in Do you get accounting?)
The total inventory you own is an asset, and it goes on your Balance Sheet.
Inventory also gets its very own financial calculation, Cost of Goods Sold. It represents the amount you paid for the items you sold. That gives you a good number to compare with your sales to see how much money you made. It’s usually figured once a year, and is a required section on your income tax return in the USA.
Here’s the formula to calculate it:
- Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold.
All those numbers will be the wholesale cost that you paid for your inventory items.
This calculation is one reason why you must count your inventory at the beginning of each year. You’ll need to know where you started in order to figure the cost of goods sold.
Special thanks to the anonymous commenter for suggesting this topic! What small business questions do you want answered? Ask away!
This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs. If you have questions you’d like us to address in this series, leave a comment or send us an email at firstname.lastname@example.org. This is a community project!
Photo by Becky McCray.
- In an economic crisis, spend your brainpower before your dollars - November 25, 2020
- Video: How to fill empty car dealership buildings for the holidays - November 6, 2020
- How has 2020 changed the challenges rural small towns face? Tell us here - October 20, 2020
- The Idea Friendly Method to surviving a business crisis - October 6, 2020
- Join me for the Rural Renewal Symposium online Oct 13 - September 26, 2020
- Cheap placemaking idea: instant murals - September 11, 2020
- Refilling the rural business pipeline - July 7, 2020
- Huge vacant buildings: grants to renovate? - June 9, 2020
- Economic self defense for small towns - June 7, 2020
- The best things you can do for local businesses in light of coronavirus - March 27, 2020