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 can base its calculation on your sales forecast. Purchases in stock and reduction of stock through sales can be automated in your forecast.
To add an inventory component to your plan you would need to go inside an income component and click +inventory:
This will add the Inventory component with a link to the income component as you can see in this screenshot below:
Alternatively, you can add a group Inventory component that will apply its calculations to all income components in the same group.
The group inventory in this sales group can calculate stock requirements based on all 5 income components in this group:
Layout
Inventory Purchase Options
The first main choice is in regards to how you want to calculate the purchase of new inventory:
- Set stock levels: periodic purchases are worked out based on changes to levels of inventory you hold
- Cover sales in advance: monthly purchases are made to cover a defined period of sales
- Manual purchases: Enter your own values manually
Set stock levels
The intention behind this option is to automate inventory purchases based on desired values you want to maintain over time. Purchases can be triggered when you drop below certain values through your sales forecast.
'Set stock levels' has 3 options you can configure:
- Maximum value: when purchases are made, the purchase calculation will target this value to purchase up to.
- Minimum order value: each purchase must be no lower than this value
- Drop below: purchases are only triggered when your balance sheet inventory value drops below this amount from sales and/or write off
There are two main ways you can use these options:
- Purchasing up to a limit (variable purchases)
- Purchasing a fixed amount (fixed purchases)
1) How to purchase up to a limit
In the above screenshot, each time your stock dips below £12,000 it will trigger a purchase. It will purchase enough to end that period with £50,000 stock.
If you always wanted to maintain £50,000 (or any value) of stock at the end of each period, you could make the value inventory must drop to to also be £50,000. This means, each month it would always trigger a purchase if below £50,000 and take it back up to £50,000 by the end of the month.
2) How to purchase a fixed amount when you reach the minimum level
When you use the 'maximum value' your purchases will vary each time depending on the level your stock.
If you want to purchase a fixed value each time a purchase is triggered, you can bypass the maximum value.
To do this, simply set 'maximum value' to £1:
In the above screenshot, every time stock goes below £10,000 a purchase of exactly £50,000 will occur. This means the amount of stock you finish a period with after a purchase might vary but the purchase will always be the same.
Cover Sales in Advance
This option will make purchases every single month (if required).
Every month the inventory component will look at your sales forecast and your current stock. It will then purchase enough to ensure you cover X amount of months of sales in the future (including the current month).
X is the value you enter into the cover field.
Entering 1 month will mean it is always looking at the month of sales ahead. Entering 6 means, each month, it will look at the next 6 months ahead.
Example
Setup
Income forecast: £1000 per month
Inventory cost: 50% of income
Purchased: 3 months in advance.
Result
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.
Manual Purchases
Manual purchases allows you to enter the amount and timing of your purchases. It begins as X per month format:
You can change it to a table in order to enter your ad hoc purchase predictions.
Inventory reduction (expense) Calculation Options
Once you've chosen how to purchase your stock, you can set up how your stock is reduced with your sales.
Similar to Cost of Sales, you have 3 ways to calculate the cost of your inventory purchases:
- Percentage of sales: 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
Inventory Write Off
If some of your inventory is damaged, spoiled or lost, it can be written off as a percentage of your current stock value. This will count as an additional expense, reducing the total inventory held.
Repurchasing written off inventory
Depending on your purchase setting, written off inventory can be replaced automatically.
- Set stock levels - repurchase is handled by purchases triggered by set inventory levels
- Cover sales in advance - automatically repurchased each month to cover sales
- Manual Purchases - separate toggle option
For manual purchases there is an additional option below write off:
This allows you to turn on an automatic repurchase of stock whenever it is written off. This will be an additional purchase on top of the manual purchases you enter.
Opening Inventory
If you have purchased inventory before the plan started, then you should enter its cost value here. The toggle at the top of the component can be turned on to reveal an opening inventory field:
This figure will appear in the Existing Inventory line on the Opening Balance tab in settings:
Back to components introduction