LICEO DE CAGAYAN UNIVERSITY

SCHOOL OF GRADUATE STUDIES

Financial Management Subject

Topics
Management of Inventory
Investment Management
Sources of Short-Term Capital

Submitted by:
Engr.Jessie Radaza Tutor
MMME-2

Submitted to:
Mariano M. Lerin, Ph.D., CPA
Professor

Management of Inventory
The importance of the investment in inventory tends to proportional to the companys
need to protect itself against potential lost sales. For example, inventory is a significant
working component when the production or processing time is long, when raw materials
require substantial purchasing lead time and when the finished goods require sufficient
exposure to potential buyers. For the typical manufacturing firm, the concern of the
finance manager in inventory management is normally limited to controlling the total
investment in that asset and the related flow of funds.
Inventory Control
In operational terms, the overall level of investment of inventory depends on the
capability of the company to control individual items in its inventory. Such control is
inadequate if stocks-outs are experienced in some production lines while others may be
overstocked.
Two types of costs in inadequate control
1. Lost sales opportunities
2. Unnecessary carrying costs
Volume of Inventory is the total amount of whatever it is they deal in that the publishers
have in their inventory. This would be the number of whatever it is that they have on
hand.
The Economic Order Quantity (EOQ) Model
As the name suggests, Economic order quantity (EOQ) model is the method that
provides the company with an order quantity. This order quantity figure is where the
record holding costs and ordering costs are minimized. By using this model, the
companies can minimize the costs associated with the ordering and inventory holding.
In 1913, Ford W. Harris developed this formula whereas R. H. Wilson is given credit for
the application and in-depth analysis on this model.
The economic order quantity (EOQ) is a model that is used to calculate the optimal
quantity that can be purchased or produced to minimize the cost of both the carrying
inventory and the processing of purchase orders or production set-ups.
Formula
Following is the formula for the economic order quantity (EOQ) model:

Where Q = optimal order quantity

D = units of annual demand

S = cost incurred to place a single order or setup
H = carrying cost per unit
This formula is derived from the following cost function:
Total cost = purchase cost + ordering cost + holding cost
Limitations of the economic order quantity model:
It is necessary for the application of EOQ order that the demands remain constant
throughout the year. It is also necessary that the inventory be delivered in full when the
inventory levels reach zero.
Underlying assumption of the EOQ model
Following are the underlying assumptions for the EOQ model. Without these
assumptions, the EOQ model cannot work to its optimal potential.
The cost of the ordering remains constant.
The demand rate for the year is known and evenly spread throughout the year.
The lead time is not fluctuating (lead time is the latency time it takes a process to
initiate and complete).
No cash or settlement discounts are available, and the purchase price is constant
for every item.
The optimal plan is calculated for only one product.
There is no delay in the replenishment of the stock, and the order is delivered in the
quantity that was demanded, i.e. in whole batch.
These underlying assumptions are the key to the economic order quantity model, and
these assumptions help the companies to understand the shortcomings they are
incurring in the application of this model.
Inventory Turnover
The inventory turnover ratio measures the rate at which a company purchases and
resells products to customers. There are two formulas for inventory turnover:

Sales
Inventory

OR

Cost of Goods Sold

Average Inventory

The first formula is considered to be more common. The second formula

accommodates the fact that sales are recorded at market value while inventory is
recorded at cost, and its use of average inventory smoothes the effects of seasonal
inventory changes. Because there are two formulas, it is important to be clear about
which is being used when comparing inventory turnover ratios.

In general, low inventory turnover ratios indicate a company is carrying too

much inventory, which could suggest poor inventory management or low sales. Excess
inventory ties up a company's cash and makes the company vulnerable to drops
in market prices. Conversely, high inventory turnover ratios may indicate a company is
enjoying strong sales or practicing just-in-time inventory methods. High inventory
turnover also means a company is replenishing cash quickly and has a lower risk of
becoming stuck with obsolete inventory. However, higher is not always better, and
exceptionally high inventory turnover may indicate a company is running out of items
frequently or making ineffective purchases and therefore losing sales to competitors.
It is important to understand that the timing of inventory purchases, particularly those
made in preparation for special promotions or new-product introductions can suddenly
and somewhat artificially change the ratio.
Investment Management
Investment means the investing of money or capital in order to gain profitable returns ,
as interest, income or appreciation in value.
Concepts
1. The Risk-Return relationship
2. Diversification
3. Asset allocation
4. Time in your side
5. Dont time the market
6. Monitor and adjust as needed

Investors
An investor is a person who allocates capital with the expectation of a financial return.
The types of investments include:
equity, debt securities, real estate, currency, commodity, derivatives such as put and
call options, etc. This definition makes no distinction between those in the primary and
secondary markets. That is, someone who provides a business with capital and
someone who buys a stock are both investors. An investor who owns a stock is known
as a shareholder.

There are three broad motives for capital investment:

renewal of worn out assets
acquisition of additional assets to expand the business and increase output
innovation to reduce costs and/or to create new value.
Elements of an Ideal Invetsment
1)High Dividends (or high rental for properties) - must be at least 10% yield per year
2) Good long-term growth prospects (good fundamentals) - must at least beat the
country's inflation
3) on technical analysis point of view, it would be best if that particular investment is
near its bottom (near support line)
4) Flexible exit point if things didnt go your way (i always put a stop-loss on most of my
investments) - properties would be hard to satisfy this requirement since the process of
selling a property may takes ages!
5) clear profit target - the investment you are buying must be transparent enough for
you to find your Target Profit price. Plan ahead - when it has risen in price, you must
know at what price do you want to sell it for a profit.

Risk in Invetsment
1.
2.
3.
4.

Market Risk
Default Risk
Inflation Risk
Mortality Risk

Insurance is the claimed to be the best option for investment. It is a form of investment
that is stable as long as the premiums are paid. In case of life insurance, for example,
your beneficiary will obtain a death benefit upon an event of your untimely demise. This
benefit is called "face value" and the premiums that need to be paid should surpass its
value. The additional funds go into an account and are invested by the insurance
corporation on your behalf, which means that if the insurance investment is profitable,
the cash account will augment over the years.
Real estate investing involves the purchase, ownership, management, rental and/or
sale of real estate for profit.

Corporate securities
are securities issued by joint stock companies act, companies and organizations of
other legal forms of ownership, as well as banks, investment companies and funds.
Corporate Security embraces five main activities
1.
2.
3.
4.
5.

Securing business continuity

Assuring know-how security
Protecting technology and computer networks
Guaranteeing proprietary rights and material possessions.
Assuring physical security

Stock Market in the Philippines

A stock market or equity market is the aggregation of buyers and sellers (a loose
network of economic transactions, not a physical facility or discrete entity)
of stocks (shares); these are securities listed on a stock exchange as well as those only
traded privately.
The Philippine Stock Exchange (Filipino: Pamilihang Sapi ng Pilipinas) (PSE: PSE) is
the national stock exchange of thePhilippines, one of the oldest stock exchanges
in Southeast Asia, having been in continuous operation since its inception in 1927. It
currently maintains two trading floors, one at its headquarters at the PSE Plaza Ayala
Triangle, Ayala Tower One in Makati City's Central Business District, and one at the
Philippine Stock Exchange Centre (Tektite Towers), Ortigas Center in Pasig City.
Investing in the Stock Market

Government Securities
A government security is a bond or other type of debt obligation that is issued by a
government with a promise of repayment upon the security's maturity date. Government
securities are usually considered low-risk investments because they are backed by the
taxing power of a government.
Government securities are usually issued for two different reasons. The primary reason
that most government securities are issued is to raise funds for government
expenditures. The federal government issues treasury securities to cover shortfalls
(deficits) in its annual budget. Additionally, cities will often issue bonds for construction
of schools, libraries, stadiums, and other public infrastructure programs.
Problems in Investment

Short Term Capital

Liquid funds or assets that can be turned into liquid funds within less than a one
year period. The amount of short-term capital that a business has available to it typically

determines how much it can afford to devote to its operating expenses and will often
affect its growth rate.

Internal sources( raised from within the organization)be in the form of additional
capital-perhaps used for expansion.
Trade Credit(Accounts Payable) is the credit extended by one trader to another for
the purchase of goods and services. Trade credit facilitates the purchase of supplies
without immediate payment. Trade credit is commonly used by business organisations
as a source of short-term financing. It is granted to those customers who have
reasonable amount of financial standing and goodwill.
Financing Companies are specialized financial institution that supplies credit for the
purchase of consumer goods and services. Finance companies purchase unpaid
customer accounts at a discount from merchants and collect payments due from
customers. They also grant small loans directly to consumers at a relatively high rate of
interest.
Commercial Bank is a type of bank that provides services such as accepting deposits,
making business loans, and offering basic investment products including short term
capital.
Money Market became a component of the financial markets for assets involved in
short-term borrowing, lending, buying and selling with original maturities of one year or
less. Trading in the money markets is done over the counter and is wholesale. Various
instruments
exist,
such
as treasury
bills, commercial
paper, bankers'
acceptances, deposits, certificates
of
deposit, bills
of
exchange, repurchase
agreements, federal funds, and short-lived mortgage-, and asset-backed securities.

References:
http://www.investinganswers.com/financial-dictionary/financial-statementanalysis/inventory-turnover-4803
http://forum.wordreference.com/showthread.php?t=2594968
http://fiduciarynews.com/2013/06/7-basic-investment-concepts-every-401k-participantmust-understand/
http://businesscasestudies.co.uk/syngenta/investment-appraisal-in-action/reasons-forinvestment.html#axzz39CGmou2F
www.wikipedia.com
Saldana, C., Financial Management