CORPORATE FINANCE/

FINANCIAL MANAGEMENT

Inventory Management

- Dr. Sandeep Goel

 INVENTORY MANAGEMENT
Inventory
- Goods held for sale by a firm

 Raw Material
 Work-in-Progress
 Finished Goods
 Stores and spares

Inventory Management
- To maintain an ‘optimum level’ of inventory at which the
total inventory costs are minimized.
 COST OF HOLDING INVENTORY
1. Ordering Cost - ‘Cost of acquiring raw materials (or supplies)’

(Cost per order x No. of Orders)

- Cost of placing an order and securing supplies.

 Purchase requisition
 Purchase Order
 Transportation
 Receiving, inspecting and recording

 Generally it remains constant per order.

2. Carrying Cost - ‘Cost of holding’ (Carrying cost per unit x
- Cost of keeping items in stock. *Average Inventory)

*Order size /2
 Interest on Investment
 Store-keeping cost
 Deterioration and obsolescence losses
 Insurance premium
 Handling, etc.

 Larger the volume of inventory higher the carrying cost

and vice-versa

Total Cost = Ordering Cost + Carrying Cost

 Determination of Economic Order Quantity (EOQ)

- EOQ is the optimal size of the order at which total inventory

cost ( ordering cost + carrying cost) is minimum.

Quantity of Order Total Inventory Cost

 ECONOMIC ORDER QUANTITY

Total costs

Carrying Costs

Costs

Ordering costs

(EOQ)

Quantity Per Order

EOQ =
2UO
C

 U = Annual Demand (units)

 O = Ordering Cost per order
 C = Carrying cost / Storage cost per unit

 Generally ,Carrying cost is expressed as a percentage of

purchase price.
Example
A refrigerator manufacturer purchases 1,600 units of a certain
component from the supplier. His annual usage is 1,600 units. The
order placing cost is Rs. 100.The cost of purchasing one unit is Re1
and the cost of carrying one unit for a year is Rs. 8. Calculate the
EOQ.

Solution
EOQ =
2UO
C
=
2 x 1,600 x 100
= 200 units 8
 TARGET COSTING – ‘JIT’
U.S. vs. JAPAN

US Companies Japanese Companies

 33% use price minus profit  100% used price minus profit
(67% use cost plus pricing)
 Cost estimates need great  Achieve 80% accuracy of cost
improvements estimates at product concept stage
 CORPORATE FINANCE/
FINANCIAL MANAGEMENT

Receivables Management

- Dr. Sandeep Goel

 CREDIT POLICY

• Credit Standards
- Selection of customers who will be granted credit
and determining their individual limits.
 CUSTOMER PROFITABILITY ANALYSIS
“ Customer is the king!”
Situation:
Customers: 2
Name: Wise & Intelligent
Qty. & mix purchased by both: Same
What is the Price?: Same price
Time: Same

Issue: Are they both equally profitable for the company?

• Identify the best customers.

 Types of Customers
High

Champion Demander
 Product/service is crucial  Pays top-shelf price

 Good trading match  Costly to serve

Product
Margin

Cheapskate Losers
 Price-sensitive  Low buying power

 Low service requirement  Buying low-margin

Nominally Very
demanding demanding

Low

Cost-to- Serve
 CORPORATE FINANCE/
FINANCIAL MANAGEMENT

Cash Management

- Dr. Sandeep Goel

 WHAT IS CASH?

• Cash and Bank Balance

- Ready cash / ready money

• Cash Equivalents
- Near money assets
Marketable securities /Short term, highly liquid investments
(Readily convertible into cash having a maturity of
less than 3 months)
 Cash Management Cycle
Business operations Cash collections

Sales and services Deficit Borrow

Surplus Invest

Cash payments