Inventory
Inventory describes the extra amount of merchandise or supplies your business keeps on hand to meet the demands of your customers. If your business is a retail business, your largest asset is probably your investment in inventory. If your business involves manufacturing goods, your inventory will likely consist of materials needed for producing the final product, work in progress, and finished goods. If you have a service-related business, you may hold an inventory of goods or materials needed to perform your services for your customers.
Much like accounts receivable, inventory represents an investment of your business's cash — cash that cannot be used for other cash outflow purposes. Typically, a business purchases inventory and either pays for it at the time of the purchase, or within 30 days. Depending on the nature of your business, it may be days or weeks before the inventory is resold; or used in the manufacturing of a final product, and then sold. Therefore, your business's investment in inventory has a significant impact on your cash flow. An over-investment in inventory reduces the amount of cash that could be available for other outflow purposes. Good cash flow management requires that you examine your inventory investment to avoid an over-investment.
These inventory analysis tools can be used to help manage your investment in inventory:
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