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The experts can argue about direct vs indirect and

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Unformatted text preview: ’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. Not all companies manage inventory. Product-related companies normally do have inventory, and service-related companies normally don’t. There are many exceptions, though, so if you have doubt, ask your accountant or somebody connected to your company who knows. ESTIMATING INVENTORY Use simple assumptions to estimate inventory flow and inventory purchases. (Amounts shown in thousands. Numbers may be affected by rounding.) Inventory gets into your cash flow when you pay for it. Estimate your inventory needs as months of inventory on hand, then estimate inventory flow as a matter of estimating sales and inventory purchases. Payments depend on the rest of your payments policy, because inventory purchase amounts enter the system when an invoice is received, but they are paid when the related invoices are paid. In the illustration above, 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 Payments Details illustration on the previous page. Calculating the Cash Balance When you’re done with both sections — receipts and spending — then you can calculate cash flow by subtracting spending from receipts. Cash flow is the change in the balance from one month to another. You calculate cash balance by taking the ending balance from the previous period and adding (or subtracting) cash flow. The sample cash plan shown here below does just that. HURDLE: THE BOOK 16.8 CALCULATING THE ON BUSINESS PLANNING CASH BALANCE Calculating cash flow and cash balance isn’t always intuitive, but understanding its two main sections is important. (Amounts shown in thousands and...
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