If you manage inventory or stock in your organisation and plan to do a 3-Way, Cashflow or Balance Sheet Forecast then you'll need to budget for this inventory.
In this help note we'll look at how to budget for inventory using the Periodic Inventory accounting method, as well as identify the required Cashflow Settings.
There are two generally accepted principals used in accounting for inventory and they are - Perpetual and Periodic.
For help with identifying what accounting method you use please refer to the Inventory Financial Settings help article. If you use the Perpetual accounting method please refer to the help article Budget for Inventory (Perpetual method).
The accounts involved in Periodic Inventory and the cashflow settings required are as follows.
For a full explanation on Cashflow forecasting including cashflow settings please refer to the Step by Step Guide to Cashflow Forecasting help article.
|Accounts ||Cashflow Type|
|Inventory on Hand (Asset) - Calxa calculates this budget automatically||None|
|The Inventory on Hand Asset account above is the Balance Sheet account that records your stock on hand. It is calculated using your Inventory settings.|
|Opening Inventory (Cost of Sales) ||None|
|Closing Inventory (Cost of Sales)||None|
|Inventory Movement (Cost of Sales) ||None|
|Note: The journals on the 3 Cost of Sales accounts above are a book entry only (Opening/Closing/Movement), designed to record the inventory movement and adjust Cost of Sales, therefore they have no cashflow effect and must be set with a cashflow type of None. Users generally use either either Opening/Closing Inventory accounts or an Inventory Movement account, not both.|
In the Inventory screen you can nominate all 4 of the above accounts. This will automatically set the Cashflow type to None for all accounts and calculate the Inventory on Hand Asset budget for you (see budgeting below).
|Purchases (Cost of Sales)||Creditor Days or custom Profile|
|With the periodic inventory method, Purchases is the only account that has a cashflow effect. Creditor Days is therefore the default cashflow setting, but you may also choose a custom Profile.|
Budgeting for Periodic Inventory
We recommend following these 3 steps.
- Budget for Sales
- Budget for Purchases
- Budget for Inventory Movement
Step 1 - Budget for Sales
You can create your sales projections however you like, but here are a few suggestions.
- Use the Budget Factory to create your full P&L budget based on last year’s actuals with some percentage adjustments.
- Use the Budgets & Actuals screen to enter some sales projections.
- Build sales budgets in Excel and import them into Calxa.
Step 2 – Budget for Purchases
As per Budget for Sales, you could use the Budget Factory with prior year actuals, enter some budgets manually or use an Excel model to import.
Step 3 – Budget for Inventory Movement
(using either the Opening/Closing Inventory or Inventory Movement accounts)
With Periodic Inventory Cost of Sales is calculated as:
Cost of Sales = Opening Inventory + Purchases – Closing Inventory
There are numerous ways to record this in your accounting, but most commonly we see Opening and Closing Inventory accounts or a single account that represents Inventory Movement in Cost of Sales. These Cost of Sales accounts then balance against the actual inventory movement (included in the Inventory on Hand Asset account) on the Balance Sheet.
As discussed earlier, the Opening and Closing Inventory Accounts should have a cashflow type of None. Budgeting on accounts that have a cashflow type of None in Calxa requires the budgeted values are balanced, however If you use the Inventory settings with the Periodic method, Calxa will automatically create the balancing budget on the Balance Sheet (Asset) accounts. Therefore all you need to do is worry about the Cost of Sales accounts.
If you wish to handle this manually - perhaps you have multiple stock accounts and require a more accurate split of the balancing budgets, then you'll need to ensure the budgeted movements on the balance sheet match what you budgeted in Cost of Sales. Please refer to the help note - Balancing your Budget with the Discrepancy Analysis Report for more details.