Businesses, big or small, need to give special attention to inventory. The success of the business depends upon the attention given to inventory accounting. This is where manufacturing inventory control software can help. Small as well as big businesses cannot go without this type of software.
Inventory is usually the largest current asset of a business that sells products. If the inventory account is greater at the end of the period than at the start of the reporting period, the amount the business actually paid in cash for that inventory is more than what the business recorded as its cost of goods sold expense. The cash flow from profit is computed by substracting the difference between the previous and the present inventory from the net income.
The prepaid expenses asset account works in much the same way as the change in inventory and accounts receivable accounts. However, changes in prepaid expenses are usually much smaller than changes in those other two asset accounts.
The beginning balance of prepaid expenses is charged to expense in the current year, but the cash was actually paid out last year. This period, the business pays cash for next period’s prepaid expenses, which affects this period’s cash flow, but doesn’t affect net income until the next period. Simple right?
As a business grows, it needs to increase its prepaid expenses for such things as fire insurance premiums, which have to be paid in advance of the insurance coverage, and its stocks of office supplies. In ordder to grow, businesses cant avoid to increase their accounts receivable, prepaid expenses, and inventory. Rarely do you find a business that can increase its sales revenue without increasing these assets.
The lagging behind effect of cash flow is the price of business growth. Managers and investors need to understand that increasing sales without increasing accounts receivable isn’t a realistic scenario for growth. In the real business world, you generally can’t enjoy growth in revenue without incurring additional expenses.
Successful businesses dedicate one deparment to take care of the inventory accounting discussed earlier. Performing inventory accounting is particularly testing for starting businesses that cannot afford to set up a dedicated department for this purpose. It is where small business inventory software can help.
