Question

why is inventory such a difficult working capital item to manage

why is inventory such a difficult working capital item to manage

Homework Answers

Answer #1

Inventory is dificult to manage for the following reasons:

  1. It takes the longest duration to get converted into cash as it has to undergo transformation first into finished goods, then to receivables and then to cash.
  2. As its procurement takes time, it has to be bought and stored in advance so that production is not interrupted.
  3. The investment in inventory is idle and it incurs holding and carrying costs.
  4. Determining the optimum level of inventory depends on many variables affecting the demand for and supply of the inventory items.
  5. Inventories are subject to risks of deterioration in quality, risks of physical loss, risk of obsolescence, etc.
  6. While managing inventory one has to balance between the stock out costs and the costs of carrying inventory.
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