Measurement of Inventories and Receivables

In Pharma Industry, or for that matter any industry, knowing how well the
working capital is managed is very crucial to the health of the Company.
Inventory or Receivables are a part of Working Capital Management.
Either of these in absolute terms do not give us any idea. For example, if
Company A has an inventory of Rs 100 Cr and Company B has an inventory
of Rs 500 Cr on a specific date, one cannot arrive at a conclusion that A
manages W/c better than B or vice versa. It depends of several factors such
as composition of the Inventory, i.e. Good, Obsolete, Liquid or non-liquid,
the inventory turnover ratio vis a vis sales, the Gross sales and so on.
One measure of Inventories is in terms of number of days or forward cover.
Forward cover means to what extent does your inventory (good usable)
last in future to cover your sales if the inventory is FG or production plans
if we are referring to RM, PM.
Typically, companies use the method of adjusting existing stocks as on the
date of measurement against future demand (budget) month after month
or take into account moving average of a) three or b) six or c) twelve
months to compute Inventory in No of Days forward cover. Depending on
each company, either option a or b or c is employed to calculate.
While computing Inventories we look at future numbers. We do not
consider past history except to depend on it for judging trends in sales or
consumption. At a point in time we look at future numbers only.
Receivables denote the money that is due to the Company but not received
by the company. It is due or overdue. When overdue i.e. beyond
permissible credit days, the amount unpaid is overdue and typically
attracts penal interest between 14-21% pa. As receivables arise because of
past occurrences or sales made in the past periods, the way to calculate or
measure Receivables is similar to Inventories except that it is based on real
actual past sales numbers. Here again, normally, moving average is
calculated to determine no of days. ( Moving average example is explained
in excel sheet)
As students of Pharma Supply Chain it is important to understand Ageing
analysis, Non Moving or Slow Moving inventories, and how to measure
Inventory no of days or Outstanding. The attached Excel files will give
examples and table will indicate the measurements.