When you have goods ready for sale, you report the total amount in your finished goods inventory. Your finished goods inventory is a balance sheet account you use when you have inventory in different stages of production. If you make your own goods, you use this financial report alongside your raw materials and in-progress accounts, which report on inventory you haven’t yet started or that still needs work.
Advantages of Finished Goods Inventory Accounts
Because it’s considered a short-term asset for tax purposes, finished goods inventory appears as a current asset on your balance sheet. Tracking your inventory with this financial report helps you better plan for the future, as it lets you estimate how many finished products you have or can have available if you’re going to a trade show, taking items to market, or accepting a large order. Your finished goods inventory also helps you analyze other important information. It differentiates between goods that sell quickly and those that sell slowly, identifies which items need more physical security from theft, and estimates the amount of warehouse space you need to store your products.
Using Finished Goods Inventory as a Liquid Asset
Knowing the products you have on hand also helps if your small business has a cash crisis. These finished items serve as highly liquid assets that are easier to store than raw materials or works in progress. For example, $25,000 of finished inventory plus $15,000 in raw material lets you know at a glance that you have $25,000 of goods you can typically offload more quickly. If you just list the figure as $40,000 in general inventory, you can’t plan ahead as effectively when you’re in a crunch.
Staying on top of your finished goods inventory helps you not only with day-to-day operations but also during planning stages and at tax time. Using accounting software such as QuickBooks Online provides you with a handy way to create financial reports with minimal effort. Keep your books accurate and up to date automatically with Quickbooks to change the way you manage your finances now.