Working Capital Management - Inventory

Overview

Inventory is generally considered to be finished goods that will be sold within the year. That means that they are included in the definition of current assets. And also, that they are semi-liquid assets, assets that will soon be converted to cash.

As such, inventory management is included within the working capital management.

Forecasting Inventory Needs

Managing inventory means balancing between various needs of the company.

• Meeting Customer Demand - first, a company needs to have inventory on hand if they are meet incoming customer demand. For companies that can produce goods and services on demand, this may not be required, but even in this case, the company must maintain a stock of raw materials or other inputs required to produce their product. Forecasting customer demand is often the purvue of the marketing department. In order to adequately meet forecasted demand, the company needs to understand its production cycle and be able to forecast inventory.
• Maintaining Liquidty - building inventory requires the company to spend its cash, and this reduces the amount of immediate liquidity available.
• Holding no Idle Resources - when a company spends its cash to produce product, that cash cannot be used for other investments, which could include financial securities that offer a return. As such, the company will not want to over-invest in inventory that it cannot sell right away.