13.2 Inventory and Accounts Receivable Management

Inventory and accounts receivable are crucial components of working capital management. Companies must balance having enough inventory to meet demand while minimizing costs, and efficiently collect payments from customers to maintain healthy cash flow.

Effective inventory management involves optimizing turnover, implementing just-in-time systems, and managing risks. For accounts receivable, businesses focus on improving collection speed, setting appropriate credit policies, and using tools like factoring to manage cash flow.

Inventory Management

Measuring and Optimizing Inventory Efficiency

Top images from around the web for Measuring and Optimizing Inventory Efficiency

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Economic Order Quantity Theory | AllAboutLean.com View original

  Is this image relevant?

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Economic Order Quantity Theory | AllAboutLean.com View original

  Is this image relevant?

1 of 3

Top images from around the web for Measuring and Optimizing Inventory Efficiency

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Economic Order Quantity Theory | AllAboutLean.com View original

  Is this image relevant?

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Determining the Efficiency of Fuzzy Logic EOQ Inventory Model with Varying Demand in Comparison ... View original

  Is this image relevant?

• 

  Economic Order Quantity Theory | AllAboutLean.com View original

  Is this image relevant?

1 of 3

• Inventory turnover measures how efficiently a company manages its inventory by calculating the number of times inventory is sold and replaced over a given period
  • Calculated as cost of goods sold divided by average inventory
  • Higher inventory turnover generally indicates more efficient inventory management (retail industry)
• Just-in-time (JIT) inventory is a strategy that minimizes inventory holding costs by receiving goods only as they are needed in the production process
  • Requires accurate demand forecasting and reliable suppliers to avoid stockouts
  • Reduces inventory carrying costs and improves cash flow (Toyota)
• Economic order quantity (EOQ) determines the optimal order quantity that minimizes total inventory holding costs and ordering costs
  • Takes into account demand rate, order cost, and holding cost
  • Assumes constant demand, lead time, and purchase price (manufacturing company)

Managing Inventory Risks

• Safety stock is extra inventory held to mitigate the risk of stockouts due to uncertainties in demand or lead time
  • Determined based on desired service level, lead time, and demand variability
  • Balances the cost of holding extra inventory with the cost of lost sales (electronics retailer)
• Effective inventory management requires monitoring inventory levels, setting reorder points, and adjusting safety stock based on changes in demand or supply chain risks
  • Regularly review inventory performance metrics and identify slow-moving or obsolete items
  • Use ABC analysis to prioritize inventory management efforts based on value and criticality (pharmaceutical company)

Accounts Receivable Management

Measuring and Improving Accounts Receivable Performance

• Accounts receivable turnover measures how efficiently a company collects its receivables by calculating the number of times receivables are collected during a period
  • Calculated as net credit sales divided by average accounts receivable
  • Higher accounts receivable turnover indicates faster collection and better cash flow (software company)
• Days sales outstanding (DSO) represents the average number of days it takes to collect payment after a sale has been made
  • Calculated as average accounts receivable divided by average daily sales
  • Lower DSO indicates faster collection and improved liquidity (consulting firm)

Managing Credit Risk and Collection

• Credit policy sets the guidelines for extending credit to customers, including credit limits, payment terms, and collection procedures
  • Factors to consider include customer creditworthiness, industry norms, and company's risk tolerance
  • Strict credit policies reduce risk but may limit sales, while lenient policies increase sales but also increase risk (construction supplier)
• Credit terms specify the payment period and any discounts offered for early payment
  • Common terms include net 30, 2/10 net 30 (2% discount if paid within 10 days, otherwise due in 30 days)
  • Offering discounts can encourage faster payment but also reduces profit margin (wholesaler)
• Factoring involves selling accounts receivable to a third party (factor) at a discount in exchange for immediate cash
  • Factors assume the credit risk and collection responsibility
  • Provides faster access to cash but incurs factoring fees (apparel manufacturer)
• Aging schedule breaks down accounts receivable by the length of time outstanding, typically in 30-day increments
  • Helps identify slow-paying customers and prioritize collection efforts
  • High proportion of long-outstanding receivables may indicate poor credit management or customer financial difficulties (medical practice)