Stock or Inventory Control

Stock or inventory control means more than meeting demand. Liquidity and cash flow are derived from efficient management of stock / inventory levels.

Stock / Inventory Valuation

After cash and accounts receivable, stock / inventory generally ranks as the third most liquid current asset in the balance sheet. Its value is always predicated on its cost or fair market value, whichever is the lower.

As with all current assets, the more often stock / inventory value is turned over in the course of the financial year, the greater its contribution to liquidity and operating cash flow.

Stock / Inventory and Liquidity

Current assets less current liabilities describes working capital which represents the liquidity or workin capital of the business.

A more defensive interpretation is the "quick ratio" or "acid test." This is an important measure of short term liquidity. Whereas accounts receivable represent confirmed cash flow assets, goods sitting on the shelf waiting for orders are not; which is why they are disregarded.

Controlling Stock or Inventory

The key business ratio, known as the stock turn or stock cycle describes the frequency with which the business turns goods or merchandise on the shelf into cash.

A low return can indicate either inefficient planning or that a high level of slow moving or redundant stock is being concealed within its valuation.

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