How to Analyze Inventory on the Balance Sheet

An inventory is being defined as the products and goods owned by a business that is not yet sold to customers. It is also considered an asset to the business since it will eventually be sold in the near future. In some ways, having a startup balance sheet in the inventory of your soon-to-rise business is very helpful because it helps you visualize and keep track of what’s going to happen in the next phase of the business you are planning to do.

Individuals tasked to analyze balance sheets need extra careful in doing such. Different procedures and methods are required in doing so.

 

Analyzing Inventory on Balance Sheet

When you go along analyzing inventory, inventory spreadsheet templates are needed to guide you accordingly because inventories need focused attention for the purpose of determining the progress of the core business.

Below are the things you need to do in analyzing inventory in balance sheets:

  • Have a thorough understanding of which techniques to use, either qualitative or quantitative technique. It merely depends on which one works best. Printable sheet templates are very helpful also when you have already chosen which technique to use, at least you already have something ready to use once you get started.
  • Do ratio analysis through the use of historical inventory balances by calculating them in order to determine potential problems in inventory management.
  • Conduct the inventory turnover through calculating the ratio of costs of goods sold. This is significant because helps in balancing the inventory of the items sold within the year.
  • Execute sales ration inventory through calculating the ratio of inventory to the revenue with the help of an average inventory balance, helping you to determine that an increased ratio indicates quick growth in sales while a decreased ratio is a low sales growth.
  • Research and educate yourself more regarding the business financial statements because it has a great significance in the process of inventory analysis.

Inventory Risks and Tips

Risks

  • Theft – one of the major risks in inventory as well as with inventory control, most especially when the inventory value is high.
  • Wastes and Damages – having wastes and damages in inventories is normal, especially when there is an increase in business costs.
  • Inventory Loss – this happens when there is a reduction of equities due to improper inventory management. Inventory management practices are highly recommended to avoid this risk.
  • Shelf Life – this risk happens usually in perishable goods, which is totally normal, that is why it’s very important to follow a specific time frame for these types of goods.

 

Tips

  • Know the formula: assets = liabilities + equity. Doing this in sheet templates is mainly preferable because it’s quick and easy.
  • Work on your current assets that are comprised of cash equivalents and receivable inventory including short-term obligations owed.
  • Next is the non-current assets couldn’t be converted into cash immediately like buildings and machinery, intangible assets, patents, and copyright.
  • Identify liabilities that are referred as obligations owed by a company. They are usually the bills and debts.
  • Proceed learning about the equity of shareholders where initial money is invented into business.

 

Having proper and sufficient inventory will ensure a smooth and free flowing business transactions and processes.

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