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    Planning Cash for Inventory

    As we saw in the graphics in the cash flow traps, inventory (sometimes called stock) can have a major impact on cash flow. So we have to plan for it.

    And If You Don’t Manage Inventory?
    Then you don’t have to worry. Go on. This is one cash trap that won’t catch you.

    The illustration here shows one way — and there are others — to plan for inventory. You have an idea how much inventory (by value, dollar amount) you would use to match your sales forecast. Then you assume how much inventory (in months) you need to keep on hand, and what the minimum purchase is. You can then calculate the details, as shown.

    Inventory goes into the books as an asset when it’s purchased. It leaves the company as cost of goods sold when it’s sold. The cost of inventory shows up in the cash flow when it’s paid for, regardless of when it’s sold, usually as cash spending or bill payments.

    Inventory gets into your cash flow when you pay for it. In the example here, the beginning inventory balance supplies the amounts required until the third month, when additional inventory is purchased. That purchase goes into accounts payable, and is paid as part of the normal flow of bill payments. Inventory purchase is the bulk of the $346,000 new obligations in March shown in the spending details sample on the previous page.

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