Question

Why do you think inventory management has such an impact on the financial stability of a company? Describe techniques that can be used to better control inventory.

Answer 1

Inventory management:

By nature inventory is a current asset which is shown on the assets side of the balance sheet of a company. Because of its current nature it is a liquid source of cash for any enterprise. Management of inveentory is very important for any business. The management of inventory affects many areas due to the advantages and disadvantages of how the same is handled.

Let suppose inventory is not properly handled and any excess of inventory sits, it costs the company money like ordering cost, carrying cost, inventory management cost etc. It might also be possible that the excess of any inventory becomes obsolete or slow moving or non moving, which incurs handling costs. The excess money which we can save by following inventory management can be used elsewhere. With the help of proper inventory management system we can minimize our accounts payable and finally the overall liability of the company.

So as describe above we can say that the inventory management has an impact on the financial stability of a company.

Techniques used to better control inventory:

1) Use First - in First - out (FIFO) method of inventory management

2) Regular audit of inventory like physical verification, spot cheking, surprise checking etc.

3) Good relationships with the suppliers of inventory.

4) Set par levels

5) Give priority to ABC accounting of inventory.

etc.