Question

What are some of the issues a company might face if they do not have enough inventory on hand and what ratio analysis might help management analyze inventory issues?

Answer 1

Company have to face a lot of issues if they don't have enough inventory (means company have less inventory than actually needed). If the company carries too little inventory, there is a risk(issue) of running out of stock, missing sale and missing out on cost effective.

Little inventory=Missing Sale

Consumer demand is difficult to predict; even the best forecasts rest on assumptions and demand can be approximated. Because of this there is a possibility that all the demands of the consumer can't be fulfilled due to lack of inventory with the company. That' why the issue of Missing Sale (less Sale), company might have to face due to lack of inventory on hand.

The ratio analysis which might help management to analyze inventory issues are:-

1.) Inventory turnover ratio =

cost of goods sold/Average inventory

(Higher the ratio better the situation)

This ratio shows the times of goods sold in comparison of given inventory. If ratio is high it means more times of goods is sold with less inventory and vice versa.

2.) . Current Ratio= Current assets/ current liability

(Higher the ratio better the situation but standard ratio is 2:1)

Since, Inventory is a part of Current asset. It means more inventory more ratio & better situation, on the other hand less inventory means less current asset and less ratio and bad situation.

In this way, these ratio analysis help the management to analyze the inventory issues.