Sometimes a shortcut is incredibly tempting and sometimes you didn’t even know it was a shortcut. Expensing inventory, for instance. Once the inventory is sold, it can be categorized as an expense: everyone agrees on that. So why not put it in the expense account from the get-go? It’s tempting, but it’s a really bad idea.
Recording inventory as an expense makes it difficult to track the profitability of sales, setting you up for failure before you’ve even started. It is one of the more common mistakes startups make, because aren’t we all in a hurry? But it’s a dangerous play, and one that offers you no benefit in the long run.
So What’s the “Right Way”?
Keeping a finger on the pulse of your business means keeping everything in the right categories. Your inventory should be recorded as an asset until it’s sold, after which it’s recorded as an expense in cost of goods sold. This number encompasses both purchase price and any other cost involved with getting your goods to market. Though it might seem like an extra unnecessary step, keeping your books balanced in this way enables you to see exactly how you’re doing financially, all the time.
Why It Matters
Without a true picture of your monthly Profit & Loss, you may invest too much too soon on advertising. You might end up hiring new employees, or expand your warehouse as your sales grow. But if you are not selling profitably, increased sales will only burn through your cash faster and shorten the time needed to raise capital. Keep your inventory out of the expense column until it’s sold, and it’ll be easy to see costs and profits at a glance.
Making Sense of Your Books
It doesn’t have to be complicated. At BASECAMP, we’re all about simplifying bookkeeping for CPG businesses, and we can help you organize your accounts so everything flows smoothly into place with minimum effort. Schedule a short call with us to talk about your bookkeeping needs and see if BASECAMP is a good partner for you.