FIN%204260%20Chapter%204_SLIDES

FIN%204260%20Chapter%204_SLIDES - Part II Mgmt of Working...

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Part II – Mgmt of Working Capital Chapter 4 Inventory Management Chapter 5 Accounts Receivable Management Chapter 6 Chapter 7 1
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Cash Flow Timeline 2 The cash conve rsion perio d is the time betwe The firm is a system of cash flows. These cash flows are unsynchronized and uncertain.
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Inventory Management 3 Financial Managers consider inventory an idle corporate resource. They attempt to strike a balance between holding too much inventory and not enough to earn an appropriate rate of return . Too much results in a burden on the cash resources of a firm and has higher carrying costs .
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Inventory Management 4 However, Financial Managers are not the only interested party. Sales are somewhat uncertain; so, too, is the appropriate level of inventory. Purchasing wants to keep raw materials on hand. Production wants uninterrupted production.
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Inventory Management 5 Given uncertain customer demand, three levels of inventory must be managed: Raw Materials (e.g. Steel) Work-In-Process (e.g. Engine) Finished Goods (e.g. Car) In addition to uncertain customer demand, there is also the issue of timing
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Inventory Strategy Questions 6 So, how much inventory should we carry? Should inventory be placed close to the point of purchase or the point of supply? Should we institute a just-in-time (JIT) system? Should we use a form of premium transportation for distribution?
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Inventory Management 7 There are two direct costs associated with inventory: Ordering Costs - Clerical, restocking, inspection, returns, processing, transportation, unloading, handling, etc. Holding Costs – Opportunity cost, interest expense, labor, tracking, storage (rent/depreciation), insurance, utilities, security, taxes, obsolescence, theft, etc.
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Inventory Management 8 The goal is to minimize the total cost of inventory given a desired level of customer service. Inventory decisions should be based on: The cost of ordering inventory The cost or holding inventory The opportunity cost of funds Any available discounts
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9 Firms have the opportunity to take quantity discounts . To qualify, bigger orders are required, resulting in larger average inventory levels . Larger, less frequent orders result in lower
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This note was uploaded on 11/10/2011 for the course ECON 4260 taught by Professor Victorwakeling during the Fall '11 term at Kennesaw.

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FIN%204260%20Chapter%204_SLIDES - Part II Mgmt of Working...

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