Financial Management of Inventory Holdings
For smooth implementation of the charter company should have adequate amount of stocks of raw materials, finished goods, goods for trade and so on. Given the specificity of the production cycle and characteristics of logistics in the company must maintain a rational transport, preparatory, current reserves and insurance for the whole range of inventory.
In modern conditions businesses are not rigidly imposed standards formation of working capital, and they can hold on its balance sheet as reserves as sustain their financial sources. However, despite the deregulation process of formation of current assets, the role of economic assessment required size of inventories. This information is essential to any entity for the development of a tactical line in relations with banks, suppliers, etc. exchanges. In critical situations the company may sell some of their stocks or, immediately buy them at any price, not to stop production cycle.
During the financial management of commodity inventory, special attention should be paid to the definition:
- Optimal level of order;
- The date of the order;
- Rational method of procurement.
The best is a custom size that minimizes the total maintenance cost of inventories.
As seen from the Fig. 6.10 classification, in the total expenditures allocated storage costs and the costs of ordering inventory.
As can be seen from the graph in Fig. 6.11, trends in the magnitude of these costs, depending on the amount of single orders vary. So, if at the same time ordering more inventory, reduced orders and therefore cost less to implement them. However, the purchase of raw materials and large quantities would increase the average size of the stock and, accordingly, increase the cost of storage. The aim of management is precisely to reduce the cost of storage of large quantities compared with the cost of placing more orders from determining their optimal level.
The optimal order quantity - it is ordered by the number of products for which the total cost for the organization ordering and storing inventory will be minimal.
In order to determine the order during the renovation, you need to know how much time passes from the moment of its design to the actual implementation (ie delivery of ordered party). This period is called a cycle of order. In practice, to determine the order cycle should match the duration of the last ten largest orders and choose.
Simplified reorder point can be found by multiplying the daily cycle order (weekly) inventory costs. For materials, parts and auxiliary materials for re-order point is the day when the request sent to the supplier. For stocks semis produced the resumption order will be the day when the light duration of the production cycle, manufacture to order a new batch of products.
Indicator optimum order volume allows you to determine the best time to renew the order, which is to establish the period between the previous supply of inventory and subsequent orders. On this day the company remains at the disposal of the critical balance of reserves, which is enough time for the receipt of a new party.
The law opened the Italo-Swiss engineer and economist Wilfried Pareto (1848-1923 pp.), Can be used in almost all spheres of human activity. Thus, on the production of this law means that 20% of the industry producing 80% of its core products; on trade - 20% wholesalers account for 80% of all trading operations and so on. al.
From the standpoint of management of inventories, this law means that 20% of stocks items occupy 80% of the cost of purchased inventory and, therefore, 80% define the overall result of inventory management. Conversely, the time and effort to hit its 80% control other items of inventory can change the overall result is not more than a fifth.
Because the law Pareto financial managers advisable to focus on those items 20% stocks, which are linked to 80% of the financial resources of the company that purpose. This category of reserves requires strict control of the specialist financial services. For this category of stocks actively advisable to apply quantitative models discussed above as by optimizing their procurement volume and time enterprise can get significant effect.
However, quantitative models of inventory management inventory can be waived in the case of:
- Unstable supply of inventory (strikes, interruptions in production, problems with importation, transportation, etc.);
- The expected increase in prices for inventories (the higher the inflation, the greater the actual stocks compared to their optimal volume);
- Uncertain economic conditions (must be a reserve in case of developments for the adverse scenario);
- Rapid physical or obsolescence of inventory (in this case, the actual volume of stocks may be rather less than optimal, which requires more frequent purchases).
An important aspect of financial management of commodity inventory is a rational way justify their purchase. It should realize that there is no perfect way of procurement and selection of specific financial management should be based on an analysis of the pros and cons of each of the alternatives, taking into account the specific conditions and objectives of the activity.
However, the practice of domestic enterprises shows the high cost of the policy. In terms of good governance commodity-material stocks, financial managers should avoid unnecessary and excessive stocks. Inventories inventories can be increased only as long as the savings exceed the total cost of maintaining additional stocks. In addition, the maximum residue must necessarily disagree with the production and marketing services.
Conversely, it is difficult and risky to perform "instant" inventory management, ie purchase material assets at the time they need (to work "on wheels"). This method of procurement is possible only if:
- Coordinated production system;
- Timely and reliable market information material;
- The availability of reliable suppliers;
- Effective operational maneuvering stocks.
So while inventory management is not a direct function of the CFO, investment of funds in inventories is an important aspect of financial management. Financial managers must be familiar with the methods of stock control and be able to effectively redeploy capital invested in them. It is necessary to realize that the greater the profitability of assets and, therefore, higher potential (alternative) costs associated with investing money in stocks, the smaller the optimal order quantity and average volume of stocks.
In an uncertain market demand for raw materials and the uncertainty of the annual needs of enterprises in stocks of inventory financial managers interested in reducing cycle order, because it decreases the need for safety stock and therefore reduces the total investment in stocks, if other conditions remain unchanged. That is, the higher the possible (alternative) costs of investing money in inventory, the more urgent is the need to reduce the timing of orders for their supply.