Question

Explain the impact on cash flows of a build-up in inventory during this pandemic and how can companies mitigate the financial impact.  Your answer should be between 200-300 words MAX.

Answer 1

Inventory is high value items and part of current assets. It results due to operating activity requirements. Inventory can be raw materials, work in process or finished goods depending on the type of company. Merchandise Company has one type of inventory that is finished goods and manufacturing company has all 3 types of inventories.

An increase in Inventories leads to cash outflow for the firm due to operating activities. Since inventories are stock required for finished goods manufacture they consume cash resources of the firm .The firm also carries risk of non moving inventories becoming obsolete especially during the currently ongoing pandemic. Since the customer orders are very less the inventories having lower shelves life will lead to losses for business due to write off.

The firm should immediately review its inventory carrying and take below actions:

· Review all the existing inventories and take appropriate action for usage

· Revise the demand schedule and accordingly reschedule the requirements of raw materials

· Lower the safety stock requirements and inform suppliers regarding the same

· Ensure suppliers are informed of revised production schedule and quantities needed for production.

· Ensure stocks are allocated between plants if the firm is having many manufacturing plants. This will ensure existing inventories are consumed.