Q1) Point out how inventory has received a lot attention in recent years. Particular attention has been given to management of inventory, which is considered one of the most overlooked sources of hidden cash. Some evidence suggests that better inventory management can potentially account for almost half of the savings from working capital optimization.
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A1) The inventory received lots of attention in recent years because a lot of capital used to buy the inventory, and until the inventory is sold. They occupy the cash flow of the company. A lot of inventory might hurt the company’s health of account.
Hence, people now do the capital optimization on the inventory, most practice is the company control the quantity of row source for reason. Company make predictions on the need of inventory, if they do not need it, they do not buy it. a company CEO need to spend more time in strategic planning as the business has high inventory levels. A company management should find how to speak with suppliers, how to improve ordering processes or how to increase market demand to reduce the high levels of inventory.
Having high inventory means that the company is facing hard time to turn over inventory and make sales. When a company has a high level of inventory, its face significant costs and inventory management requirements that have drawbacks relative to businesses that have better inventory turnover and require less resource use to manage inventory.
Furthermore, a high value inventory to working capital means that a company is carrying too much inventory in stock. High inventories can place a heavy impact on the cash resources of a business, it is not good for management. The key points for a company to improve its operation efficiency is to identify the optimum inventory levels and therefore reduce the cost tied up in inventories.
Inventory Working Capital Ratio = Inventory / Working capital
A firm usually want to make and keep only adequate inventory to meet immediate demands and to prevent stock outs. When the company has high level of inventory, it is usually not selling enough to prevent inventory buildup. Of course, this is not a good condition as companies need to turn over inventory efficiently to maintain reasonably high profit margins and to avoid the costs and other drawbacks that come with high levels of inventory.
Carrying excess inventory has significant costs. One of the highest costs for many companies is financing the purchase and holding of inventory. Also, the more inventory the company hold, the more it should spend on labor to manage it, space to hold it, and in some cases, insurance to protect against its loss or damage.
Inventory management is the practice managing and controlling of the ordering, storage and use of components that a company uses in the production of the items it sells. Inventory management is also the practice of overseeing and controlling of quantities of finished products for sale.
Inventories that are mishandled might cause major financial problems for the company, whether the mismanagement consequences in an inventory glut or an inventory unavailability.
Positive inventory management includes making a buying plan to make sure that all items are available when they are required. The two-common inventory management plans are the just-in-time (JIT) method, where company plan to get items as they are needed instead of maintaining high inventory levels, and materials requirement planning (MRP), which schedules material deliveries based on sales forecasts.
Inventory to Working Capital Analysis • The Strategic CFO. (2017, January 16). Retrieved March 05, 2017, from https://strategiccfo.com/inventory-to-working-capital-analysis/
Blokhin, A. (2015, October 05). Does working capital include inventory? Retrieved March 05, 2017, from http://www.investopedia.com/ask/answers/100515/does-working-capital-include-inventory.asp
Writer, L. G. (2011, August 27). Disadvantages of High Inventory Levels. Retrieved March 05, 2017, from http://smallbusiness.chron.com/disadvantages-high-inventory-levels-20400.html
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