Page 407 - F1 Integrated Workbook STUDENT 2018

Working capital management – receivables, payables, inventory
and cash

3.2 Problems

Keeping inventory levels high is expensive owing to:

 The foregone interest that is lost from tying up capital in inventory.

 Holding costs:

– storage

– stores administration

– risk of theft/damage/obsolescence.

If inventory levels are kept too low, the business faces alternative problems:

 High re-order/set up costs.

 Stock outs:

– lost contribution

– production stoppages

– emergency orders.

 Lost quantity discounts.

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