Finished Goods Inventory

What does it mean

Finished Goods is a subcategory of inventory which typically contains the total value of raw materials that have completed the production process and are ready for sale.  For example in a coffee roasting business, this value would include coffee that is totally complete and ready to be sold.  Please note that at this point, finished goods are valued at their total COST and not their retail value.  The retail value is not reflected in the financials until the product is actual sold to the end customer.  

Why does it matter

Knowing the breakdown of the inventory between Raw Materials, Work in Process and Finished Goods is important for two main reasons.

The first is that inventory is likely a major component of the collateral for any operating debt that is provided.  Why this matters is because certain types of collateral are better than others.  In the case of inventory, the Raw Materials and Finished Goods provide more collateral value than does the Work in Process, and the reason is pretty easy to understand.  It is a lot easier to find someone to purchase either the inputs of a product (bags & unfrosted coffee beans) or the finished product (shelf ready bags of roasted coffee), but it is more difficult to find someone to purchase partially completed orders that are in the manufacturing process.  Due to this, the advance rates for these items differ with a lower advance rate typically being given to Work in Process.

The second reason is that understanding the breakdown of inventory between the three types helps to see how the business is operating. 

Changes in Finished Goods levels could indicate the following:

•  Finished Goods Increases
•  Pace of revenue is slowing
•  Product obsolescence
•  Customer built up inventory for seasonal sales
•  Finished Goods Decreases
•  Pace of revenue is increasing
•  Supply chain issues
•  Becoming more efficient

Changes in balance sheet values typically can have both positive or negative reasons for why they occur.  Identifying these changes and having a conversation with the customer helps to know which one it is.

Other Relevant Terms

• Capital
• Current Assets
• Current Liabilities
• Raw Materials
• Inventory
• Work in Process
• Return to Terminology Library