Page 61 - FINAL CFA SLIDES DECEMBER 2018 DAY 11

Session Unit 11:

Inventory Management, p.88 38. Working Capital Management

Inventory levels that are too low will result in lost sales due to stock-outs, while
inventory that is too large will have carrying costs because the firm’s capital is tied up in

inventory.

Reducing inventory will free up cash that can be invested in interest-bearing securities or

used to reduce debt or equity funding.
• Increasing average days’ inventory or a decreasing inventory turnover ratio can both
tanties
indicate that inventory is too large. A large inventory can lead to greater losses from

obsolete items and can also indicate that obsolete items that no longer sell well are
included in inventory.

• Comparing average days of inventory and inventory turnover ratios between industries,
or even between two firms that have different business strategies, can be misleading.
The grocery business typically has high inventory turnover, while an art gallery’s

inventory turnover will typically be low. An auto parts firm that stocks hard-to-find parts
for antique cars will likely have a low inventory turnover (and charge premium prices)

compared to a chain auto parts store that does most of its business in standard items like
oil filters, brake parts, and antifreeze.