Role of inventory management in working capital

Home - inventory management

This web site is designed to help navigate you through the mountain loads of information about inventory management.

ROLE IN WORKING CAPITAL

Inventories are a component of the firm's working capital and, as such, represent a current asset. Some characteristics are important in the broad context of working capital management, including:

1. Current Asset: It is assumed that inventories will be converted to cash in the current accounting cycle, which is normally, one year. In some cases, this is not entirely true, for example, a vintner may require that the wine be aged in casks or bottles for many years. In spite of these and similar problems, we will view all inventories as being convertible into cash in a single year.

2. Level of Liquidity: Inventories are viewed as a source of near-all cash. For most products, this description is accurate. At the same time, most firms hold some slow-moving items that may not be sold for a long time. With economic slowdowns or changes in the market for goods, the prospects for sale of entire product lines may be diminished. In these cases, the liquidity aspects of inventories become highly important to the manager of working capital. At a minimum, the analyst must recognize that inventories are the least liquid of current assets. For firms with highly uncertain operating environments, the analyst must discount the liquidity value of inventories significantly.

Site pages | Other business articles | Terms Of Use | Resources | business guides