Many businesses — probably the majority of LivePlan users — don't have any inventory, because they just offer services. For example, an attorney's office doesn't have any raw materials or completed goods in stock, the way that a furniture manufacturer would. They just do the work and then bill for their time.
Inventory is generally relevant only to companies that sell products. It consists of the raw materials required to manufacture those products, as well as any you have built or are building but have not sold yet. Service companies typically have no inventory, since billable hours don’t involve physical goods that you can stockpile for future use.
If your company has no need to manage inventory, you can just leave the inventory setting off. But, if you do need to manage inventory, this article will explain the inventory settings in LivePlan.
- To change your inventory settings, click on the Forecast tab, and then More.. > 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 two inventory settings:
- Months to keep on hand: This first setting is the number of months of inventory that you want to keep in stock. LivePlan will use the direct costs associated with your projected sales to calculate the right amount for each period, ordering more when you need it. 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 our calculation finds that you need more inventory, it automatically builds an order into the schedule.
But, if you are only a dollar short of what you will need, you probably don’t want us to plan on ordering a dollar of inventory. Suppliers typically have a minimum order size. This setting collects that minimum order size, so 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:
How inventory is calculated in LivePlan
Here is the basic formula LivePlan uses for the inventory calculation:
(Total inventory on hand) - (Cost of sales for the months on hand) = Remaining inventory balance
If your remaining inventory balance is negative, it means you do not have enough inventory in stock to cover the number of months you wanted to keep on hand. In this case, you will need to reorder, at a bare minimum, the amount that you are negative. This is where the minimum order size comes in. LivePlan will calculate an inventory order that is either the amount that will bring your remaining inventory balance positive or the minimum purchase amount you specified, whichever is larger.
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:
In the 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: