inventory management|Legit essays
Posted: February 11th, 2023
450 words. APA Citation
Reference Links-
1. https://www.youtube.com/watch?v=maF024vY1es&ab_channel=eFinanceManagement
2. https://www.youtube.com/watch?v=iNm8sNDjDgs&ab_channel=RonaldMoy%2CPh.D.%2CCFA%2CCFP
Close to 50% of the typical industrial and retail firm’s assets are held as working capital. Many newly minted college graduates work in positions that focus on working capital management, particularly in small businesses in which most new jobs are created in today’s economy.
To prepare for this Discussion: Shared Practice, select two of the following components of working capital management: the cash conversion cycle, the cash budget, inventory management, and credit policies. Think about scenarios in which your selected topics were important for informing decision-making. Be sure to review the video links above and conduct additional research using academically reviewed materials, and your professional experience on working capital concepts to help develop your scenarios. Support your discussion with appropriate examples including numerical examples as necessary.
SOLUTION
The Cash Conversion Cycle (CCC) is the time taken between a company’s purchase of raw materials and its collection of cash from its customers. It represents the time between a company’s investment in inventory and its realization of cash from its sales. CCC is important in decision-making as it determines a company’s ability to manage its cash flow. A high CCC means that a company takes longer to convert its inventory into cash and could face a cash flow problem. For example, if a company’s CCC is 90 days, it means that on average it takes 90 days to turn its inventory into cash.
A company can manage its CCC by reducing the time it takes to convert its inventory into cash. For example, a company could negotiate with suppliers to shorten the payment terms, or it could offer its customers faster payment options, such as credit cards, to reduce the time it takes to collect cash from its customers.
Inventory management is another important component of working capital management. Inventory management involves balancing the cost of holding inventory with the cost of stockouts. Companies must maintain an optimal level of inventory to meet customer demand while avoiding excessive inventory holding costs. For example, a company may choose to hold more inventory to ensure that it can meet customer demand, but this could lead to higher inventory holding costs. On the other hand, holding too little inventory could result in stockouts, which could lead to lost sales and damaged customer relationships.
In decision-making, inventory management can inform a company’s production and purchasing decisions. For example, if a company sees that its inventory levels are high, it may choose to reduce its production levels to bring its inventory levels down. Similarly, if a company sees that its inventory levels are low, it may choose to increase its production levels or purchase additional inventory to meet customer demand.
In conclusion, the cash conversion cycle and inventory management are important components of working capital management that can inform decision-making. Companies can use these components to ensure that they have enough cash flow to meet their operational needs, and that they have an optimal level of inventory to meet customer demand.
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