Question

As a result of the COVID-19 crisis, many companies are planning to increase inventories going forward as a way of hedging against disruptions in supply chains. Explain why an increase in inventory may increase companies’ need to raise external financing to manage liquidity

Answer 1

Inventories are the part of the current assets. If compnay build up the inventories, this will be either purchased from internal cash or external financing. In situation of COVID-19, companies also need to maintain the liquid position to pay their liabilities and smooth running of operations. In this situation, company need to have high cash position and high inventory to hedge the disruption in supply chain.

Therefore, company will raise money to build up their inventories. This situation will arise for heavy industries like capital goods, automobile etc.