Working Capital Management

CHAPTER 7 Inventory and Working Capital Issues

This chapter covers these topics:

• Consideration of appropriate policies and organization for inventory management
• Understanding how ratios and other metrics assist in inventory management
• Learning about problems in purchasing and work-in-process inventory
• Evaluation of new techniques such as EOQ, JIT, and SCM
• Review of such financing alternatives for inventory as asset-based lending

IN CHAPTER 6, WE NOTED THE MANY issues involved in managing a seemingly simple working capital activity, accounts receivable. As we discussed, the process is far more complicated than sell and wait for payment. Managing inventory is similar, in that finance managers typically do not become involved in inventory decisions, traditionally the responsibility of manufacturing. Furthermore, the concept of “inventory” makes sense on the balance sheet but is too vague in dealing with the realities of working capital issues. There are two aspects of inventory management:

1. The purchasing of materials and components.
2. The management of those materials and components as they are retrieved and used to produce goods for sale, referred to as work-in-process (WIP).

Various economic and financial factors should be considered in managing inventory, including economic order quantity—that is, how much should be ordered at any particular time; price, volume purchasing, and the possibility of pricing concessions; the timing of delivery of material prior to the beginning ...