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OBJECTIVES

The basic responsibility of the financial manager is to make sun: the firm’s cash flows are managed efficiently. Efficient management of inventory should ultimately result in the maximization of the owner’s wealth, It was indicated in that in order to minimize cash requirements, inventory should be turned over as quickly as avoiding stock outs that might result in dosing down the production line or lead to a loss of sales. It implies that while the management should try to pursue the financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demands. In other words, the financial manager has to reconcile these two conflicting requirements. Stated differently, the objective of inventory management consists of two counterbalancing parts. (i) to investments in inventory, and (ii) to meet a demand for the product by efficiently organising the production and sales operations. These two conflicting objectives of inventory management can also be expressed in terms of cost and benefit associated with inventory. That the firm should minimise investment in inventory implies that maintaining inventory involves cost such that the smaller than inventory, the lower is the cost to the firm. But inventories also provide benefits to the extent that they facilitate the smooth functioning of the firm the larger the inventory, the better it is from this viewpoint. Obviously the financial managers should aim at a level of inventory which will reconcile these conflicting elements. That is to say, an optimum of inventory should be determined on the basis of the trade-off between costs and benefits associated with the levels of inventory.

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