Inventories constitute the most significant part of current assets of the business concern.
It is also essential for smooth running of the business activities.
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A proper planning of purchasing of raw material, handling, storing and recording is to be
considered as a part of inventory management. Inventory management means, management
of raw materials and related items. Inventory management considers what to purchase,
how to purchase, how much to purchase, from where to purchase, where to store and
when to use for production etc.
The dictionary meaning of the inventory is stock of goods or a list of goods. In accounting
language, inventory means stock of finished goods. In a manufacturing point of view,
inventory includes, raw material, work in process, stores, etc.
Kinds of Inventories
Inventories can be classified into five major categories.
A. Raw Material
It is basic and important part of inventories. These are goods which have not yet
been committed to production in a manufacturing business concern.
B. Work in Progress
These include those materials which have been committed to production process
but have not yet been completed.
These are the materials which are needed to smooth running of the manufacturing
D. Finished Goods
These are the final output of the production process of the business concern. It
is ready for consumers.
It is also a part of inventories, which includes small spares and parts.
Objectives of Inventory Management
Inventory occupy 30–80% of the total current assets of the business concern. It is also
very essential part not only in the field of Financial Management but also it is closely
associated with production management. Hence, in any working capital decision regarding
the inventories, it will affect both financial and production function of the concern. Hence,
efficient management of inventories is an essential part of any kind of manufacturing process
The major objectives of the inventory management are as follows:
• To efficient and smooth production process.
• To maintain optimum inventory to maximize the profitability.
• To meet the seasonal demand of the products.
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• To avoid price increase in future.
• To ensure the level and site of inventories required.
• To plan when to purchase and where to purchase
• To avoid both over stock and under stock of inventory.
Techniques of Inventory Management
Inventory management consists of effective control and administration of inventories.
Inventory control refers to a system which ensures supply of required quantity and quality
of inventories at the required time and at the same time prevent unnecessary investment
in inventories. It needs the following important techniques.