Inventory Management

Like receivables, inventories represent a significant investment for many firms. For a typical manufacturing operation, inventories will often exceed 15 percent of assets. For a retailer, inventories could represent more than 25 percent of assets. From our discussion in Chapter 19, we know that a firm's operating cycle is made up of its inventory period and its receivables period. This is one reason for considering credit and inventory policy in the same chapter. Beyond this, both credit policy and inventory policy are used to drive sales, and the two must be coordinated to ensure that the process of acquiring inventory, selling it, and collecting on the sale proceeds smoothly. For example, changes in credit policy designed to stimulate sales must be accompanied by planning for adequate inventory.

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