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
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
Template for Project
(Excel not available in D2L – Build It!)
Income Statement
(Excel not available in D2L – Build It!)
Statement of Cash Flows
(Excel not available in D2L – Build It!)
Sales-Inventory-ManufacturingBacklog
In our first model we assume that we would
manufacture exactly what we sold
We might need to start manufacturing in advance
of the sales so that we can meet the demand and
make delivery (why?)
Excel: Module 3 - Sales+Inventory.xlsx (not in
D2L)
Inventory Rules
An increase in assets decreases cash
Inventory is valued at Cost and is an Asset
The Inventory Equation:
Ending Inventory = Beginning Inventory + manufacture – sales
𝑰𝑵𝑽𝒋 = 𝑰𝑵𝑽𝒋%𝟏 + 𝑴𝑭𝑮𝒋 − 𝑺𝑨𝑳𝑬𝑺𝒋
Assuming all sales are fulfilled in period j
Revised Sales 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
Inventory Accounting Rules
Ending Inventory in $$s goes straight to the Balance
Sheet (BSj) in period j
Inventory’s impact on Cash Flow is as follows:
CF1 = -BS1
CF2 = -(BS2 – BS1)
CFj = -(BSj – BSj-1)
CF is the Cash Flow Value
BS is the Balance Sheet Value
Subscript definitions:
1 is the 1st period (month)
2 is the 2nd period (month)
j is any subsequent period (month)
j-1 is the period (month) before j
Look at new Balance Sheet
Excel: Module 3 - Sales+Inventory.xlsx
Cash Flow Statement
Excel: Module 3 - Sales+Inventory.xlsx
ISSUE!! --- Cash Flow Statement
Excel: Module 3 - Sales+Inventory.xlsx
New Cash Flow Statement
Summary
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