Opening Day Balance Sheet – Inventory
The opening day inventory forms part of the opening balance sheet of the business. Inventory represents raw materials, work in process, and finished goods that the business holds for resale.
The inventory balance is recorded in the balance sheet at cost or net realizable value if lower. It is shown under the heading current assets, which means it is expected to be convertible into cash within a year.
Inventory Opening Balance in the Financial Projection
The inventory included in the opening balance sheet is no different than any other inventory, only the timing differs.
The opening balance is simply the balance that was there before the first day of the financial projection. Consequently if the inventory is manufactured or purchased after the first day, it will show up as part of the inventory in the appropriate year. It is important to realize that the opening inventory should not be included in both places as this will result in double counting.
The date on which the financial projection starts is entirely a matter of personal choice. Generally it is better to have it consistent with the start of a financial year.
Established Business Plan
For an established business, there will normally be an inventory opening balance. Consequently the value of this opening balance can be found on the latest available balance sheet. The figure to use is the total of the amounts shown under any of the headings inventory, raw materials, work in process, finished goods, or any other inventory related headings.
Startup Business Plan
For a startup business we recommend our startup costs calculator. This calculator produces an opening balance sheet for inclusion in the financial projections template.
The figure to use is the value of inventory shown under the heading opening balance sheet in the calculator. This is effectively the amount of inventory the business has when it starts trading. It is important to realize that the inventory is part of the startup assets which are funded by the opening debt and equity injections.
Finally having entered the inventory opening balance, the template calculates the inventory at the end of each subsequent year. The calculation is done by multiplying the average daily cost of sales for the year by the inventory days.
Closing inventory balance = Average daily cost of sales x Inventory days
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template, is to enter the opening accounts payable in the opening balance sheet of the financial projection.
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on how our template is used to produce simple financial projections for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.