{"id":22531,"date":"2019-08-01T16:00:46","date_gmt":"2019-08-01T10:30:46","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=22531"},"modified":"2019-09-05T18:20:27","modified_gmt":"2019-09-05T12:50:27","slug":"manage-inventory-reduce-working-capital","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/manage-inventory-reduce-working-capital\/","title":{"rendered":"Manage Your Inventory Wisely to Reduce the Working Capital"},"content":{"rendered":"<p>For every business, <strong><a href=\"https:\/\/enterslice.com\/working-capital-enhancement\">working capital<\/a><\/strong> is required for operating the business of the Company. Rotating of the fund in the business is very important. If the circulation of the fund is not done properly the business might run into negative cash flow. For every business to manage the inventory plays a crucial role. To control the inventory the purchase volume should meet with the sales and the forecast.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Meaning of Inventory<\/h2>\n\n\n\n<p>Inventory is the term for the raw material used for the production of the final product to sell. Inventory is termed as one of the important assets of the business because it generates revenue and subsequent earning for the business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Nature of Inventory<\/h2>\n\n\n\n<ol><li><strong>Raw Material Inventory<\/strong><\/li><\/ol>\n\n\n\n<p>Raw Material is the basic material for manufacturing the final product. It is important to keep the minimum raw material inventory. For example in the food industry the ingredients which are used are perishable it should be used within a specific period of time, if it gets expired then the ingredient can&rsquo;t be used which results in the loss. Thus the raw material inventory is very important.<\/p>\n\n\n\n<ul><li><strong>Work in Process Inventory<\/strong><\/li><\/ul>\n\n\n\n<p>It comprises partly finished goods, in this process\nthe raw material is put in the process for the production of the final product.\nIt is most desirable that the volume of inventory that is lying in the form of\nwork in progress should be kept at a minimum and the time taken to convert into\nthe final product should also be minimized so that the amount invested in the\nraw material can be realized as quickly as possible.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/07\/inventry.png\" alt=\"\" class=\"wp-image-22554\" width=\"313\" height=\"321\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/07\/inventry.png 778w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/07\/inventry-292x300.png 292w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/07\/inventry-768x789.png 768w\" sizes=\"(max-width: 313px) 100vw, 313px\"\/><\/figure><\/div>\n\n\n\n<ul><li><strong>Finished Goods Inventory: Finished goods are the\nfinal products<\/strong><\/li><\/ul>\n\n\n\n<p>They are the saleable and their sale contributes\nfully to the revenue from the core operations of the Company. It means the\nproduction is completed and ready to sell.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Types of Inventory<\/h2>\n\n\n\n<ol><li><strong>Transit Inventory<\/strong><\/li><\/ol>\n\n\n\n<p>The inventory which is taken from one place to\nanother either through Pipeline, road, railway, shipping or by air will result\nin some transportation time involved for getting the inventory delivered. For\nexample, the petroleum Company&rsquo;s transports are done through various modes i.e.\npipeline, roadways or shipping, etc. The inventory might take days or weeks to\nget delivered.<\/p>\n\n\n\n<ul><li><strong>Buffer Inventory<\/strong><\/li><\/ul>\n\n\n\n<p>Inventory sometimes are stored in excess to meet\nthe uncertainties or to meet the possible future events. This stock has been\ncreated to protect against uncertainties or unpredictable events.<\/p>\n\n\n\n<p>If the buffer inventory stock is higher, better the\nfirm customer service. Buffer inventory is stock kept to meet future demand. To\nmeet customer satisfaction it is necessary to provide the services promptly.<\/p>\n\n\n\n<ul><li><strong>Anticipatory Inventory<\/strong><\/li><\/ul>\n\n\n\n<p>The firms or the Company purchase the inventory above current need to meet the possible future event. Such an event may include a price increase, a seasonal increase or any other un-circumstances event which may occur. For example, during the summer season, the demand for Mango increases or any festival which comes nearer the demand increases accordingly. Therefore to smoothen the process any business person maintains a balance between the demand and supply.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What are the techniques to manage your Inventory?<\/h2>\n\n\n\n<ol><li><strong>Keep the Inventory at the minimum level:<\/strong><\/li><\/ol>\n\n\n\n<p>The business person must purchase the inventory at a minimum level, so the amount of capital remains to unblock and can run the business smoothly. According to the demand and supply in the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a>, the inventory should be kept.<\/p>\n\n\n\n<ul><li><strong>Management of Receivables:<\/strong><\/li><\/ul>\n\n\n\n<p>The term receivables mean debt owed to the firm by the customers resulting from the sale of <a href=\"https:\/\/en.wikipedia.org\/wiki\/Goods_and_services\">goods or services<\/a> in the ordinary course of business. The policy should be framed like within a certain period of time the payment should be made against the goods purchased.<\/p>\n\n\n\n<ul><li><strong>First in First out approach:<\/strong><\/li><\/ul>\n\n\n\n<p>For every business, it is essential to maintain a\nsystem on a FIFO <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a> i.e. any product purchased first should be sold out\nfirst so that existing product does not get expired, damaged, etc.<\/p>\n\n\n\n<ul><li><strong>Inventory software:<\/strong><\/li><\/ul>\n\n\n\n<p>The software should be maintained in the business to keep track of the inventory. An effective software will lead you to manage the time and money. It will give a clear idea of your stock report.<\/p>\n\n\n\n<ul><li><strong>The Stock should be audited at a certain interval\nof time:<\/strong><\/li><\/ul>\n\n\n\n<p>Depending upon your business size the audit of the\nStock to be carried out, to check whether the stock report carried out through\nthe inventory software matches with the audit report carried out at an interval\nperiod of times.<\/p>\n\n\n\n<ul><li><strong>Analysis of Stock:<\/strong><\/li><\/ul>\n\n\n\n<p>The Stock should be analyzed, if the stock which\nhas not been sold for a longer period of time then the strategies should be\nframed like Special discount, promotional schemes, vouchers, etc.<\/p>\n\n\n\n<p>So that the inventory can be managed and loss of\ncapital reduces at a minimal level.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How improper managed Inventory can affect your business?<\/h2>\n\n\n\n<ol><li><strong>Inventory not properly managed:<\/strong><\/li><\/ol>\n\n\n\n<p>In business either the stock is not maintained\naccording to the demand of the customer or the overstock is maintained it can\nlead the business into the negative.<\/p>\n\n\n\n<ul><li><strong>Stock not delivered at the proper time:<\/strong><\/li><\/ul>\n\n\n\n<p>If the stock is not managed properly then it becomes impossible to deliver the stock at a time. In Unmanaged inventory, it becomes difficult to track the inventory available in the warehouse and as a result, the delivery of the orders got delayed.<\/p>\n\n\n\n<ul><li><strong>Customer not satisfied:<\/strong><\/li><\/ul>\n\n\n\n<p>Not only inventory but certain aspects affect the\nquality of the product, not delivered on time, high cost and the customer loses\nthe loyalty and faith which leads to customer dissatisfaction.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Inventory should be managed wisely to reduce the\nworking capital:<\/strong><\/h3>\n\n\n\n<ol><li><strong>Cash Flow Management<\/strong><\/li><\/ol>\n\n\n\n<p>If the working capital has been blocked in\npurchasing the inventory then it becomes quite difficult to survive it may\nresult in it into the Cash crunch. So the cash flow must be managed accordingly\nso if any future contingency arises the business can survive if cash flow is\nmanaged properly.<\/p>\n\n\n\n<ul><li><strong>Payment Delays<\/strong><\/li><\/ul>\n\n\n\n<p>In many industries, it happens when the inventory\nis sold there are delays in receiving the payments which may lead to the block\nof working capital. Therefore it is essential to keep the credit policy so that\nthe payment model remains stagnant.<\/p>\n\n\n\n<ul><li><strong>Improve creditworthiness<\/strong><\/li><\/ul>\n\n\n\n<p>By managing working capital it affects the credit cycle of the Company which in turn improves the status of the Company in the market attracting more potential in the market from supplier to the end-users.<\/p>\n\n\n\n<p><strong>Notes:<\/strong><\/p>\n\n\n\n<p><strong>How the Working Capital is calculated:<\/strong><\/p>\n\n\n\n<p>You can calculate the working capital by using the\nfollowing formula:<\/p>\n\n\n\n<p><strong>Working\nCapital= Capital Assets- Capital Liabilities<\/strong>.<\/p>\n\n\n\n<p>Let&rsquo;s take the example, by going through XYZ\nPrivate Limited Balance sheet<\/p>\n\n\n\n<table class=\"wp-block-table\"><tbody><tr><td>\n  <strong>Assets<\/strong>\n  <\/td><td>\n  <strong>&nbsp;<\/strong>\n  <\/td><td>\n  <strong>Liabilities<\/strong>\n  <\/td><td>\n  &nbsp;\n  <\/td><\/tr><tr><td>\n  &nbsp;\n  <\/td><td>\n  <strong>Amount (in Rs.)<\/strong>\n  <\/td><td>\n  <strong>&nbsp;<\/strong>\n  <\/td><td>\n  <strong>Amount(in Rs.)<\/strong>\n  <\/td><\/tr><tr><td>\n  Cash\n  <\/td><td>\n  50,000\n  <\/td><td>\n  Payables\n  <\/td><td>\n  30,000\n  <\/td><\/tr><tr><td>\n  Receivables\n  <\/td><td>\n  25,000\n  <\/td><td>\n  Expenses\n  <\/td><td>\n  22,000\n  <\/td><\/tr><tr><td>\n  Inventory\n  <\/td><td>\n  80,000\n  <\/td><td>\n  Long\n  term Debt\n  <\/td><td>\n  40,000\n  <\/td><\/tr><tr><td>\n  <strong>Total<\/strong>\n  <\/td><td>\n  <strong>1,55,000<\/strong>\n  <\/td><td>\n  <strong>Total<\/strong>\n  <\/td><td>\n  <strong>92,000<\/strong>\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<p>So the Total Working Capital of XYZ Private Limited\n<\/p>\n\n\n\n<p><strong>Working\nCapital =Rs. 1,55,000- Rs.92,000 = Rs. 63,000<\/strong><\/p>\n\n\n\n<p>It reflects the positive working capital and also\nindicates that the Company can repay its liabilities within a short period of\ntime. If the working capital is negative it indicates that a Company is not\nable to pay its liabilities.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Now let&rsquo;s take the example of e-commerce industry how the inventory is\nmanaged<\/h2>\n\n\n\n<p>For each product it will show the following\nbreakout:<\/p>\n\n\n\n<ol><li><strong>Availability: <\/strong>The current product ordered by the Customer and shipped to the Customer.<\/li><li><strong>In process: <\/strong>The status of the product which has been ordered to check whether it is in transit or under shipping or currently processed at the warehouse.<\/li><li><strong>Not able to deliver: <\/strong>The Inventory ordered by the customer is currently available but not able to sell due to damage or for any other reasons.<\/li><li><strong>Reserved: <\/strong>The product which has been ordered and received at the center which has been reserved for the current order or in transit.<\/li><li><strong>Fulfilled by: <\/strong>It depends upon whether the product delivered is fulfilled by concerned e-commerce industry or they give the platform to the third parties to fulfill the product.<\/li><\/ol>\n\n\n\n<p>Through this process, the inventory is managed\nwhich results in managing the working capital.<\/p>\n\n\n\n<p><\/p><h3><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/inventory-audit\/\">Inventory Audit: Purpose of Inventory Audit<\/a><\/mark>.<\/h3>\n","protected":false},"excerpt":{"rendered":"<p>For every business, working capital is required for operating the business of the Company. Rotating of the fund in the business is very important. If the circulation of the fund is not done properly the business might run into negative cash flow. For every business to manage the inventory plays a crucial role. To control [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":22556,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2415],"tags":[2393],"acf":{"service_id":"0"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Manage Your Inventory Wisely to Reduce the Working Capital - Enterslice<\/title>\n<meta name=\"description\" content=\"For every business, working capital is required for operating the business of the Company. 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