The inventory component is used to model the purchase of your stock of products that you hold and sell over time. Like the cost of sales component, it bases the amount of stock purchased on your sales forecast. This component will purchase enough stock to cover your estimated sales, providing options for purchasing enough in advance to cover several months.
A Group Inventory component will apply its calculations to any Income components in the same group as it. Alternatively, to have different inventory setups for each Income component, you can add Inventory components as 'children' of Income components from inside the Income component form.
The difference between Cost of Sales and Inventory
Both these components work in very similar ways and are covering the same type of financial task. They are both about modelling how much it costs to buy or make the products you will be selling.
Cost of sales is used for modelling a direct cost related to a sale. For example, if you are selling products online through an online payment gateway, you may have a percentage charge for every transaction you make. It's nothing to do with holding inventory, it's just a cost that happens every time you sell something.
You may also want to use cost of sales for products you sell to order, where you don't actually hold inventory but just buy what you need based on the orders coming in.
Inventory is used for modelling items that you buy, often in advance, then sell. It has the same direct cost element of cost of sales but it also models the value of stock in your storeroom.
Similar to Cost of Sales, you have 3 ways to calculate the cost of your inventory purchases.
- Percentage: cost worked out as a percentage of your total sales.
- Cost per unit: a cost per unit sold (income component needs to be set to income per unit for this to work)
- Manual entry: Enter a custom amount not connected to the income component
Like cost of sales, this cost will be seen on your cash flow and profit & loss reports. Unlike cost of sales, it also adds a value to your balance sheet to represent the worth to your business.
Purchasing inventory in advance
After deciding how you want to calculate your inventory purchases, you can make the component automatically look a certain number of months ahead in your sales forecast and purchase the required inventory amounts in advance. Enter a number of months you want to purchase in advance.
Income forecast: £1000 per month
Inventory cost: 50% of income
Purchased: 3 months in advance.
The inventory cost per month will be £500 (50% of £1000).
In the first month, there will be a larger cost of £1500 representing 3 months bought in advance.
It will always maintain 3 months worth of inventory when setup this way so the value on your balance sheet will always be £1500. If your sales forecast varies (let's say it increases) then this setting will automatically adjust and purchase more in advance, increasing how much inventory you hold.
Note If you set the cost calculation to Manual Entry you will not have this option. Manual is a way of entering in your own amounts and timings without any automatic calculations or assumptions going on. If using manual, you'll probably want to press the 'Show as table' button to enter your custom amounts into a grid.
You can choose to write-off a certain percentage of your inventory each period (either per month, per quarter or per year). If you do, the inventory component will automatically buy more inventory each period in order to meet your sales forecast.