what if current inventory purchases outweigh profitable monthly sales?

Question

In other words the sales show us as profitable but the inventory purchases are more than the sales and profits. This is because inventory purchases go to costs of goods. So, what should I make of this? Obviously I'm concerned.

Answer 1

You are confusing Income Statement accounts with Balance Sheet accounts. Inventory purchases do not automatically go to cost of sales. Only when an item is sold should the cost of goods sold be recorded. You can be profitable on paper, but you may run out of cash if you continue to buy inventory that is not sold. I'd suggest reading a basic primer on accounting.

Answer 2

You need to figure out how to decrease you inventory costs. Try negotiating with your distributor. While sales show that your stuff is selling, your prices maybe too low. Allways look to make atleast a 30% margin. That means that when you determine what all your cost are, you need to make enough to cover the cost and go beyond it by atleast 30%. If your sales are fine but your losing money, these are the possible causes.

Good Luck

Answer 3

Inventory adds to your Assets. Only the Inventory of the goods sold goes to cost of sales.

Answer 4

if you take your beginning inventory at cost for the period and add your purchases cost then deduct your ending inventory at cost,; to find your cost of goods sold. the sales less cost of goods sold would be your gross profit.your valuation of beginning inventory and ending inventory at cost is a big critical question.don't forget markdowns and shrinkage.for purchases an open to buy would help you in planed purchases with regard to your beginning inventory your planed purchases.your planed sales,and your planed ending inventory.perhaps if you worked out the cash needs for an anticipated build up of inventory,might help?

Answer 5

In any given month, might not be a problem, depending on your purchasing cycle. But if you've got a steady buildup of inventory, even if you're making a profit on what you sell you could be getting into trouble if you can't sell a large portion of the items you're buying.

Answer 6

You better start making some sales or lose your butt!