Small Biz Survival

The small town and rural business resource

A row of small town shops

Inventory basics for small businesses

By

Flower stallAn anonymous commenter asked us to confirm that inventory does not affect profit and loss statements, but does affect cash flow.

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 becky@smallbizsurvival.com. This is a community project!

Photo by Becky McCray.

About Becky McCray

Becky started Small Biz Survival in 2006 to share rural business and community building stories and ideas with other small town business people. She and her husband own a retail liquor store in Alva, Oklahoma, and a small cattle ranch nearby. Becky is an international speaker on small business.

Wondering what is and is not allowed in the comments?
Or how to get a nifty photo beside your name?
Check our commenting policy.
Use your real name, not a business name.


Don't see the comment form?
Comments are automatically closed on older posts, but you can send me your comment via this contact form and I'll add it manually for you. Thanks!

Comments

  1. One good book that EVERY entrepreneur should read is “Finance for nonfinancial managers” By Robert Cooke.

    Explains all the tough concepts of accounting with very easy examples.

Howdy!

Glad you dropped in to the rural and small town business blog, established in 2006.

We want you to feel at home, so please take our guided tour.

Meet our authors on the About page.

Have something to say? You can give us a holler on the contact form.

If you would like permission to re-use an article you've read here, please make a Reprint Request.

Want to search our past articles? Catch up with the latest stories? Browse through the categories? All the good stuff is on the Front Page.

Shop Local

Buy local buttonReady to set up a shop local campaign in your small town? You'll need a guide who understands how we're different and what really works: Shop Local Campaigns for Small Towns.

Best of Small Biz Survival

More of the best of Small Biz Survival