Question

Why are cash management and inventory control important in corporations?

Answer 1

CASH MANAGEMENT & ITS IMPORTANCE

• Cash is the bloodline of any corporation. The various operations like cash collection, disbursement and investment of cash can be termed as Cash Management.
• For a corporation, the cash management is one of the important tasks, as non-payment of its obligation will lead to event of default and the business will be termed non-solvent.
• Any corporation of all sizes (small or big), in all industries, the business has to give importance to cash flow and its budget, which is prepared based on the company’s strategy.
• Generally, the cash flow is managed based on operations, investment and finance, based on the cash generated and used, which helps the corporations on the source and uses of the cash.
• If any major expenditure is projected such as capital expenditure or chunky repayment of obligations, etc., the company has to build up the reserve over the period.
• The proper cash management also provides the companies in liquidity and will enable it to handle business exigencies.
• Sufficient cash in hand shall also enable corporations to borrow at favorable terms or take a decision of not borrowing as well.
• Surplus cash should also be managed in such a way to be generating income, but also be available at the time of requirement.
• The ultimate goal of proper cash management is to reduce surprises at the time of cash requirement by the business.
• Cash management not only improves the efficiency of the cash deployment, but also overall cost of doing business.

INVENTORY CONTROL & ITS IMPORTANCE

• Inventory control involves controlling of inventory in operation and accounting. It not only involves receipt and issue of Inventory goods, but also maintaining adequate records on the same.
• The primary goal of inventory control is to collaborate the different related process in the business such as raw material purchase, manufacturing of goods and marketing of finished goods.
• A typical manufacturing company utilizes many raw materials to process it into finished goods. Non-availability of raw materials would hamper the production plan of the firm. Proper inventory control would ensure the availability of right raw material in right quantity at right time.
• Inventory control is not just about making available of raw material, but availability of the right quality raw material at the low cost possible. The firm can decide based on the number of orders placed with suppliers, holding cost of the inventory, discounts, price fluctuations, etc.
• A firm cannot utilize all its cash on inventory purchase and hold it indefinitely until the usage. The inventory purchase should not block the financial resources, which might be used elsewhere in line with the business strategy.
• Inventory also include the handling of finished goods. During the demand, if enough finished goods are not available or produced by the firm, it will have an opportunity loss. Inventory Control assists in reducing lost sales.
• Inventory control shall also assist in achieving efficiencies and economies in production.