INVENTORY RELATED BENEFITS AND COSTS

As indicated earlier inventories include stocks of raw materials, semi-manufactured or semi-processed goods or work-in-process and finished products. While trading businesses carry inventories of the merchants they offer for sale, manufacturing businesses carry inventories of all three kinds.

 

Raw materials inventories are maintained so that there remains some flexibility in purchasing and in production scheduling. Inventories of semi-manufactured goods ensure flexibility in production scheduling and utilization of resources, and inventories of finished products endures products scheduling and marketing.

 

By carrying inventories a firm can address to a large extent demand and lead time uncertainties. The principle followed is that of carrying what we call a “buffer”. Inventories can also ease out the flow of production when there are time lags in deliveries. Inventories may also help achieve some economies of scale in purchasing and help tide over the problems of seasonal variations. It follows from the above that there are several advantages to be derived from holding a large inventory, such as economies in production and purchasing and flexibility in operations. However, there are several disadvantages and costs associated with carrying large inventories and that is why we must devote our attention to the question of inventory management.

CASH MANAGEMENT IN PRACTICE

We now present some evidence with regard to cash management practices. This is based on few studies that been carried out in the Indian context.

 

The evidence suggest that the practices of cash inflows and outflows predictions remain much to be desired, The ‘gut feeling’ approach to cash flow forecasting is very much in vogue in Indian corporate sector; a few firms make use of quantitative forecasting models (including simulation technique). The sales price, production quantity, raw material cost, power and fuel costs, and credit collection are usually considered as critical variables fro cash flow forecasting. The most frequently cited causes of forecast errors are government control and regulations, internal management decision and the external causes like the change product demand, competitive pressure, actions of suppliers, etc.

Firms usually operate on the basis of cash budgets and most of them prepare cash flow statements separately for capital and revenue operations. Firms also prepare regular cash reports. Some prepare daily cash reports; others prepare it every month. Some of the firms prepare cash reports at more than one point of time, namely, daily as well as weekly and monthly. Utilizes these funds on the basis of daily collection reports