SIE 567
Financial Modeling for
Innovation:
Sales and Inventory
Professor Larry Head
Department of Systems & Industrial Engineering
College of Engineering
University of Arizona
klhead@arizona.edu
Sales, Manufacturing, and Inventory
Previously we looked at Sales, Manufacturing,
Inventory
Sales occur when a company submits a purchase order
for goods or services
Revenue is booked when the customers order is shipped
Shipping depends on the company’s ability to deliver the
goods or services
either manufacture what is needed or have sufficient inventory
Backlog
Negative forecasted inventory is
considered to be “Backlog”
Real inventory can never drop below
zero.
Backlog is demand for product that
can’t be satisfied.
Accumulate backlog month by month
and satisfy backlog demand as soon as
possible.
Backlog
Revenue can’t be generated from backlog (no
income until delivery is made)
How can we model backlog?
Backlog
Sales (Orders) – units that customers will pay for
when delivered (𝑆𝑖 = units sold in period 𝑖)
Manufacturing – units produced (𝑀𝑖 = units
manufactured in period 𝑖)
Inventory – units produced that are not sold
Accumulation (𝐼𝑖 = units retained in inventory in period 𝑖)
Backlog – units sold that are not delivered
Accumulation (𝐵𝑖 = units sold but not available for
delivery in period 𝑖)
Products Shipped – units delivered to customers
(revenue) (𝐷𝑖 = units delivered in period 𝑖)
Backlog
Assume 𝐼0 = 0 and 𝐵0 = 0
Inventory Update
If Current Manufacturing + Previous Inventory (Goods on Hand) is
greater than Current Sales + Previous Backlog (Demand), then
Inventory is the Total of Previous Inventory + Current Manufacturing
less (-) Current Sales and Previous Backlog
Else, Inventory is Zero
If 𝑀𝑖 + 𝐼*+, >= 𝑆𝑖 + 𝐵*+, , then 𝐼𝑖 = 𝐼*+, + 𝑀𝑖 – (𝑆* +𝐵*+, )
ElseIf 𝑀𝑖 + 𝐼*+, < 𝑆𝑖 + 𝐵*+, , then 𝐼𝑖 = 0
Excel : =IF(C9+B12>=C4+B16,B12+C9-(C4+B16),0)
Backlog Update
If Current Sales + Previous Demand is greater than Current
Manufacturing and Previous Inventory, then Current Backlog is
Previous Backlog + Current Sales less (-) Current Manufacturing
Previous Inventory
Else, current Backlog = 0
If 𝑆𝑖 + 𝐵*+, >= 𝑀𝑖 + 𝐼*+, , then 𝐵𝑖 = 𝐵*+, +𝑆𝑖 – 𝑀𝑖 + 𝐼*+,
ElseIf 𝑆𝑖 + 𝐵*+, < 𝑀𝑖 + 𝐼*+, , then 𝐵𝑖=0
Excel: =IF(C4+B16>=C9+B12,B16+C4-(C9+B12),0)
Backlog
Assume 𝐼0 = 0 and 𝐵0 = 0
Delivery (Product Shipped) Update
If Current Sales + Previous Backlog (Demand) is less
than Current Manufacturing + Previous Inventory, then
Products Shipped (Deliveries) is Current Sales + Previous
Backlog
Else, Products Shipped is Current Manufacturing +
Previous Inventory
If 𝑆𝑖 + 𝐵*+, <= 𝑀𝑖 + 𝐼*+, , then 𝐷𝑖 = 𝑆𝑖 + 𝐵*+,
Else If 𝑆𝑖 + 𝐵*+, > 𝑀𝑖 + 𝐼*+, , then 𝐷𝑖 = 𝑀𝑖 + 𝐼*+,
Excel: =IF(C4+B16<=C9+B12,C4+B16,B12+C9)
Backlog
Assume 𝐼0 = 0 and 𝐵0 = 0
𝑖=1
Inventory Update
If 𝑀1 >= 𝑆1, then 𝐼1 = 𝑀1 – 𝑆1
Else If 𝑀1 < 𝑆1, then 𝐼1 = 0
Excel: =IF(B9>=B4,B9-B4,0)
Backlog Update
If 𝑆1 >= 𝑀1, then 𝐵1 = 𝑆1 – 𝑀,
Else If 𝑆1 < 𝑀1, then 𝐵𝑖 =0
Excel: =IF(B4>=B9,B4-B9,0)
Delivery (Product Shipped) Update
If 𝑆1 <= 𝑀1 , then 𝐷1 = 𝑆1
Else If 𝑆1 > 𝑀1, then 𝐷1 = 𝑀1
Excel: =IF(B4<=B9,B4,B9)
Revised Sales, Inventory, Backlog Model
(Excel not available in D2L – Build It!)
Integration with Financial Statements
Creating inventory is equivalent to transferring
cash to inventory (products)
Value of inventory is based on the cost (Cost of
Goods Sold) – not on the potential sales value
If we sell inventory, we convert inventory back to
cash at cost (Cost of Good Sold) and we book the
revenue when the goods are delivered
Backlog doesn’t generate revenue
But a reasonable Backlog is healthy!
Products shipped generates revenue
Income Statement
(Excel not available in D2L – Build It!)
Statement of Cash Flows
(Excel not available in D2L – Build It!)
Summary
Modified the Sales model to include backlog to capture
sales when there was insufficient manufacturing or
inventory
Backlog doesn’t generate revenue
Modified the Sales model to include inventory from
manufacturing before sales (common)
Inventory converts cash to Inventory Asset on the
Balance Sheet
Adjustment to New Income on Cash Flow Statement to
show conversion of Cash to Inventory
Increased the Stock Sale or Investment Requirement
to keep business viable
Can’t have negative Cash