[Series] What Every Entrepreneur Needs to Know About Accounting – Inventory, and Prepaid Expenses

Managing Inventory

Inventory is the backbone of most businesses, but it can also be an asset that inhibits a company’s ability to turn in a profit. For example, if the inventory account at the end of your reporting period was greater than what you had recorded as your cost for goods sold expense, then this means that the business actually paid more cash during their time frame for inventory than they originally accounted for and deducted from net income. You should always monitor inventory closely to lose money on purchases while trying to regain sales.

Managing Prepaid Expenses

As we all know, you can’t walk around with a briefcase filled to the brim of money. That’s why when businesses need funds for things like travel expenses or supplies before they’re needed in-person at work, they use prepaid expense accounts – much like how some people keep cash on hand just in case their wallet is misplaced and cards are lost. Unlike inventory changes and receivables that typically see larger fluctuations than those other two assets account types due to regular business activity, any dips seen in the balance sheet will likely be more modest since it usually only reflects one instance of an outlay rather than ongoing costs incurred over time.

The beginning balance of prepaid expenses is charged to expenses in the current year, but The Company actually paid out the cash last year. This period, our company pays for future periods’ prepaid expenses with this month’s profits- a move that doesn’t affect net income until next quarter at least.

As a business grows, it needs to increase its prepaid expenses for fire insurance premiums. This is because these are paid in advance of the coverage and will help protect against loss since they have been purchased before any incident occurs. A company also has to pay more attention to their stocks of office supplies when doing so- much like inventory.

Managing Cash Flow Considerations

The lagging behind the effect of cash flow is the price you’ll pay for business growth. Managers and investors alike need to understand that increasing sales without expanding their accounts receivable isn’t a realistic scenario for revenue growth. In the real world, it’s just not possible to enjoy increased earnings without incurring additional costs.

One comment

Comments are closed.