Q.3 With the help of models explain inventory control for working capital management.
Ans INVENTORY MANAGEMENT
Introduction: Inventories are stock of the product a company is manufacturing for sale and components that make up the product.
Nature of Inventories: The various forms in which inventories exists in manufacturing company are
• Raw Materials: are basic inputs that are converted into finished product through the manufacturing process.
• Work-in-Progress: inventories are semi-manufactured products.
• Finished Goods: inventories are those completely manufactured products, which are ready for sale.
Need to hold Inventories:
• Transactions motive: emphasizes the need to maintain inventories to facilitate smooth production & sales operation.
• Precautionary motive: necessitates holding of inventories to guard against the risk of unpredictable changes in demand & supply forces & other factors.
• Speculative motive; influences the decision to increase or reduce inventory levels to take advantage of price fluctuations.
Objective of Inventory Management
• To maintain a large size of inventory for efficient and smooth production & sales operations.
• To maintain a minimum investment in inventories to maximise profitability.
The firm should always avoid a situation of over investment or under investment in inventories.
The major dangers of over investment are:
a) Unnecessary tie up of the firm’s funds and loss of profit,
b) Excessive carrying costs,
c) Risk of liquidity.
The major dangers of under investments are:
a) Production hold-ups.
b) Failure to meet delivery commitments.
An effective inventory management should:
• Ensure a continuous supply of raw materials to facilitate uninterrupted production.
• Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes,
• Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service,
• Minimize the carrying cost and time, and
• Control investment in inventories and keep it at an optimum level.
Q.4. With the help of models explain cash control for working capital management.