Inventory (stock) is one of the components of working capital of manufacturing and retails firms. Firms keep stock of goods basically to:

1. meet customers demands,

2. cash in on seasonal demand surge

3. maintain constant flow of materials in manufacturing firms

4. take advantage of bulk purchase discount offered by the suppliers

5. hedge against foreign currency risk

Because of the incentives to hold stock, firms are tempted to maintain stock level that is higher than the minimum level required but it should be noted that there are danger to maintaining stock level that is higher than needed per time. Some of these costs associated with stock holding are:

1. Storage Costs- the cost of keeping the store items in warehouse that is, rent of warehouse.

2. Insurance against fire and theft

3. hiring of security personnel to secure access to the warehouse

4. the risk of goods expiring or damage while in warehouse

On the other hand, should a firm maintain an inventory level that is below the minimum stock level the firm will tend to incur more ordering costs. Ordering costs include:

1.  expenses for a purchase order,

2. labor costs for the inspection of goods received,

3. labor costs for placing the goods received in stock,

4. labor costs for issuing a supplier's invoice

5. and labor costs for issuing a supplier payment.

The conflict between stock holding costs and stock order costs can be resolved theoretically with the Economic Order Theory (EOQ). EOQ aim at setting optimal stock level for store items by calculating the economic order quantity that take into account the costs of holding stock and the ordering costs.

The take away from the theory for our MSMEs is that, as business owners and entrepreneurs you should be careful not to keep excess stock level and also not to under stock. Both have implications on your bottom-line. Studies show that there is an inverse relationship between profitability of a firm and inventory conversion period. An inventory conversion period is the number of days it takes to convert store item to cash. That is, the number of days between the date that materials are acquired and the date that a product or service is sold. The shorter the Inventory Conversion Period, the better for the firm. Shorter conversion period help boost the firm cash flow.

Finally, do not forget that using functional accounting software like #QuickBooks for managing your inventory levels and engaging the services of financial experts like Seamless Accounting Solutions #SASNG will help you in attaining your goals of minimizing investment in inventory and maximizing your bottom-line.

#backingyou #EOQ

#QuickBooks #cashflow

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