The preceding two Chapters have discussed the strategies and considerations in managing two individual current assets, namely, cash and receivables. The third major current asset is inventory. The term refers to the stockpile of the products firm is offering for sale and the components that make lip the product. In other words, inventory is composed of assets that will be sold in future in the normal course of operations. The assets which firms store as inventory in anticipation of need are (i) raw materials, (ii) work-in-process (semi-finished goods) and (ii;) finished goods. The raw material inventory contains items that are purchased by the firm from others and arc converted into finished goods through the manufacturing (production) process. They are an important input of the final product. The work in-process inventory consists of items currently being used in the production process. They are normally semi-finished goods that are a various stages of production in a multi-stage production process. Finished goods represents final or completed products which are available for sale. The inventory of such goods consists of items that have been produced hut arc yet to be sold.
Inventory, as a current asset, differs from other current assets because only financial managers are not involved. Rather, all the functional areas, finance, marketing, production, and purchasing, are involved. The rise concerning the appropriate differ among the different functional areas, the financial manager is to concise the conflicting cricut points of the various functional areas regarding the appropriate inventory else will order to fulfil the overall objective of maximising. Thus, inventory management, like the management of other current assets, should be related to the overall objective of the firm. It is in this context that the present chapter is devoted to the main elements of inventory management from the viewpoint of financial managers. The objectives of inventory management are explained in some detail in Section 1. Section 2 is concerned with inventory management techniques. Attention is given here to basic concepts relevant to the management and control of inventory. The aspects covered are: (i) determination of the type of control required, (ii) the basic economic order quantity, (iii) the reorder point, and (iv) safety stocks. As a matter of fact, the inventory management techniques are a part of production management. But a familiarity with them is of great help to the financial managers in planning and budgeting inventory, hence, they are explained here. The Chapter concludes with the main points.