Many businesses don't have any inventory, because they only offer services. For example, an attorney's office doesn't have any raw materials or completed goods in stock. They just do the work and then bill for their time.
A product based business, on the other hand, needs inventory. A furniture manufacturer must purchase raw materials to make its products. Then the finished products are held as inventory until they're sold to customers.
Inventory purchases and sales play a major role in your company's cash flow, so LivePlan's inventory calculator helps you plan for the income and costs.
Beginning with direct costs
If you're using the Inventory calculator in LivePlan, you'll want to pay special attention to the direct cost entries in your forecast. In a product-based business, LivePlan is working on the assumption that your direct costs are all "costs of goods sold," or the cost of producing your product. (That excludes Direct Labor costs, which are not calculated into your inventory.) So the Inventory calculator in LivePlan begins its calculations with the totals in your Direct Costs entries.
If you're not sure that all of your Direct Cost entries are inventory-related, you may need to update some of them. For more details, read What is the difference between direct costs and expenses?
Activating inventory in LivePlan
- To activate inventory management, click on the Forecast tab, and then Cash Flow Assumptions:
- Move the Inventory switch to the ON position:
Note: If your company doesn't have inventory, leave the inventory setting OFF.
- Then adjust the first setting, which is Months to keep on hand.
This is the number of months of inventory that you want to keep in stock. LivePlan will use your direct costs to calculate the right amount for each period. When the direct costs have accumulated to a point where you have less than the minimum amount of inventory on hand, LivePlan will forecast a re-order. That purchase will appear in your Balance Sheet and Cash Flow.
Note: It's generally smart to keep your inventory to the minimum that you need, since buying inventory means tying up cash that could be used for other things. Many businesses carry too much inventory, and that hurts their cash position.
Use the slider to select the months to keep on hand:
- Minimum order size: The second setting is the minimum order size. When LivePlan finds that you need more inventory, it automatically builds an order into the Cash Flow. But, if you are only a dollar short of what you will need, you probably don’t want the software to plan on ordering a dollar of inventory. Suppliers typically have a minimum order size. So, this setting establishes that minimum order size, which ensures that any new orders are always for a reasonable amount.
Enter the desired minimum order size, and then click the Apply button to save it:
Note: If your direct costs exceed the amount of remaining inventory you have on hand, LivePlan will calculate an inventory order that is either the amount you need to cover your current sales, or the minimum purchase amount you specified, whichever is larger.
How inventory is calculated in LivePlan
Each month (or year) of your plan, this is the basic formula calculation LivePlan does:
(Total inventory on hand at end of previous month) - (Direct costs for the current month) + (Any re-orders triggered) = Remaining inventory balance at end of the current month
Here's a sample set of Inventory settings to illustrate this calculation - 3 months on hand, and $1500 minimum order:
Let's say that our sample company also has direct costs totaling $1000 per month - so LivePlan assumes we're using $1000 of inventory per month:
Here's how the basic formula above plays out:
- We start the forecast with zero inventory, and then LivePlan immediately forecasts an order of $4000 worth of inventory. (This is because we've set the calculator to keep 3 months' worth on hand, and we need enough additional inventory for Month 1 sales as well.)
- We use $1000 in inventory in Month 1, and so we end Month 1 with $3000 in inventory.
- Then in Month 2, we again subtract the direct costs for the month, which total $1000.
- We're left with $2000 of inventory on hand. Keep in mind that this $2000 is less than the 3 months of inventory we've set to keep on hand. So this triggers LivePlan to forecast a re-order, using the minimum order amount of $1500.00.
- Adding that new order of $1500 to the $2000 we still have on hand, we end Month 2 with $3500 in inventory, as shown on our Balance Sheet:
Entering Starting Inventory
If you are forecasting for an existing company (not a start-up), then you may already own some inventory that you need to account for in your forecast. Previously-purchased inventory is part of the group of Starting Balances entries we recommend for existing companies. For more on these, read Entering starting balances for an existing company.
If you are forecasting for a start-up and want to represent an opening balance of inventory, your initial order will be placed in the forecast automatically, based on the settings you've chosen for "Months to keep on hand" and "Minimum order size." To create an initial order in a specific amount, you may need to adjust these two settings until they replicate that amount. LivePlan doesn't have an entry point for placing a specific amount of inventory in a specific month; instead, it uses the automated calculation described in the section above.
Where does this entry appear in the financial statements?
Inventory doesn't appear in the Profit and Loss table, but your direct costs do, and these form the basis of LivePlan's inventory calculation.
In the Balance Sheet, the value of your inventory is shown for each month or year, calculated according to the basic formula we detailed above: (Total inventory on hand at end of previous month) - (Direct costs for the current month) + (Any re-orders triggered) = Remaining inventory balance at end of the current month:
In the Projected Cash Flow table, you'll see a "Change in Inventory" line, showing how much inventory value the company gained or lost in a particular period. This number is based on both the amount of inventory your company has purchased, and revenues from inventory sold, in that period. The resulting number is a net change, as shown below: