How to Analyze Inventory on a Balance Sheet

December 30, 2022

Starting a business is not easy. It demands patience, knowing from day to day and learning what it takes to make it possible to survive and grow. Undoubtedly, the most important factor is learning to monitor your money, and one of your best friends in this process is the inventory balance sheet.

What is an Inventory Balance Sheet?

An inventory balance sheet is a financial statement that lists the assets in your business and the liabilities your company carries at the time. It is a key document that should be kept up to date so you can get a snapshot of your business’s health. Looking at your inventory balance sheet can give you insights into your business’s health and expenses that are necessary to run it.

Components of an Inventory Balance Sheet

A balance sheet contains several elements which provide a complete picture about a firm’s financial condition. In this article, we’ll take a look at what is generally present on a balance sheet.

• Assets
• Equity
• Liabilities

1. Current Assets

These are assets that can be converted into cash within a year. They include:

• Cash and Cash Equivalents:
  Money in business checking or savings accounts.

• Inventory:
  Includes raw materials, work in progress, and finished goods ready for sale.

• Prepaid Expenses:
  Costs paid in advance, like rent or insurance.

• Accounts Receivable:
  Money owed to the business from customers for products or services sold on credit.

2. Long-term Assets

Assets that won’t turn into cash within a year, such as:

• Fixed Assets:
  Real estate, equipment, and machinery.

• Investments:
  Long-term investments that are not easily liquidated.

• Intangible Assets:
  Patents, trademarks, and copyrights.

3. Liabilities

These represent the company’s debts and obligations, categorized as:

• Current Liabilities:
  Short-term debts like payroll, rent, and taxes.

• Long-term Liabilities:
  Long-term debts such as loans and deferred taxes.

4. Shareholders' Equity

This is called the net value of the business. It is calculated by subtracting the total liabilities from the total assets.

Analyzing Inventory on a Balance Sheet

Allocating your balance sheet items to the correct sections, and making sense of inventory, are key to determining how your business is keeping track of its stock. Here’s how to do it:

1. Days Inventory Outstanding (DIO):

   This number measures how long inventory is hanging around before it’s sold. DIO is calculated by dividing inventory by the cost of goods sold, and multiplying that by 365. Financially, a higher DIO than competitors could signal problems with inventory turnover, and this means that capital could be tied up in inventory or extra storage costs could be incurred.

2. Inventory Turnover Ratio:

   This ratio indicates the frequency in which inventory is turned over within a period. It is determined by the cost of goods sold divided by the average inventory. The lower the ratio, the more a company is keeping too much stock, or its sales are slow. A higher ratio indicates that a company is managing its inventory effectively.

3. Inventory to Sales Ratio:

   This ratio measures level inventory to sales, and helps determine if inventory is matched up with sales capability. If the ratio goes up, too much inventory may be stocked, while a downward trend may demonstrate underproduction.

How to Determine Inventory Value on a Balance Sheet

In order to have a reliable balance sheet, it's vital to properly valuate inventory. There a few different methods to evaluate inventory:

1. Inventory Management Software:

   Such software helps you enter details about inventory and classify them in the current/long-term asset column. The need to generate reports is simplified since it is automated.

2. Ending Inventory Calculation:

   Calculate ending inventory by adding beginning inventory and purchases, then subtracting the cost of goods sold.

3. Manual Inventory Count:

   If the inventory data is stale, there might be a need to do a count in the warehouse, which will be more accurate but also more time-consuming.

The Importance of Inventory Balance Sheet Analysis

Inventory on a balance sheet is analyzed to help companies maintain the balance between amount of stock and demand for sales. You can see what it should sell, and see if you need to increase the amount in stock, reduce it, or increase prices, etc. Good inventory management can improve the bottom line with decreased storage costs, decreased outdated stock and inventory balancing with sales.

Optimize Your Inventory Management with the Right Tools

Success in business relies on accurate and timely inventory management, and inventory management software can help. Check out Britecheck, which keeps you current on your critical inventory data from phone or tablet with plans available to suit your business needs. Ready to maximize your efficiency with inventory management?

Sign up with Britecheck today and master your inventory balance sheet.