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Chapter 11 Defining a Business Scenario for Inventory Analysis

This chapter describes the common business challenges related to inventory management. It describes what inventory is and how it should be analyzed in order to optimize your company’s cash flow and operational results.

What Is Inventory—Asset or Liability?

Inventory: What does it mean to you and your business? Inventory means something different depending on your perspective:

• Owner of a business—it is a headache that must be managed to service the customer. The worry is that it will take up all the cash needed to invest properly in the business.
• Investor in a companyand the chief financial officer—it is a drain on cash flow that is a necessary investment to service customers. The worry is: can it be converted into enough cash to pay the bills and make money?
• The lender to a business—it is a use of cash. The worry is: can it be converted into enough cash to pay the bills?
• Vice president of sales—it is required to service the customer. The worry is that there will not be enough of what the customer wants when the customer wants it.
• Chief operating officer—it is something required to meet production/shipping schedules. The worry is that the COO will be blamed if there is not the right amount on hand at any point in time.
• Employees who have to handle it—it is necessary to service customers. The worry is finding the asset that they need. Can I find what I am supposed to move?
• The financial statements—it is described ...