With economic instability and the difficulty of predicting the behavior of the national currency, many enterprises resort to this option of ensuring their smooth operation and protection against inflation as investment in inventories.
Stock composition
Inventories - this is one of the components of working capital along with receivables and other highly liquid assets.
The level of investment in stocks will depend on forecasts regarding future demand, production plans, as well as the amount of stocks that is necessary to ensure production in case of delayed delivery of raw materials and other unforeseen situations.
At a manufacturing enterprise, inventories are, first of all, raw materials, materials, spare parts, components and finished products. Depending on the specifics of production and industry, their composition and structure may vary. The requirements for the conditions and terms of their storage will also vary.
Reasons for investing in stocks
In addition to protecting money from inflation, an increase in stocks can occur for a number of other reasons. Firstly, to smooth out fluctuations in output volumes. Then, with increasing demand, the company begins to sell previously stocked goods, without changing the volume of output. Otherwise, it would be necessary to make changes in the intensity of the production process, change schedules for the supply of raw materials, and increase supply volumes.
Secondly, stockpiled inventories help to avoid shortages while increasing demand. Third, in conditions of inflation, investment in stocks will protect them from depreciation. The purchase of raw materials and components at lower prices in the context of higher prices for finished products will give the company a short-term additional benefit in the form of excess profits from the difference between new sales prices and old material costs. It is difficult to call it a significant bonus, but partially the negative impact of inflation will be compensated. This is one of the reasons why you can invest in stocks.
Common to all of the above reasons is the company's desire for economic stability and security.
When is it unprofitable to create large stocks?
In some cases, to create large stocks of material resources will be inappropriate for the enterprise.
Firstly, depending on the type of raw material, it may deteriorate or undergo a natural decline. You also need to correlate the costs of its maintenance with the benefits of storing for future use. Secondly, the freezing of money in stocks in case of problems with the implementation will lead to the occurrence of defaults on current obligations. As a result, there may be a need to attract loans to repay current expenses, including for the payment of wages to employees, social contributions, for calculation of heat and energy resources, etc. The result will be an increase in the cost of interest on the loan and a decrease in financial independence, deterioration in liquidity indicators.
Ideally, the amount of working capital, the main share of which is stocks, should be balanced with the size of short-term liabilities.
What can an increase in stock indicate?
It all depends on which component of the stock in question. If stocks of goods and finished products are growing, and output volumes are relatively constant or are declining, this will mean a drop in demand for products.An increase in output and, accordingly, all types of stocks will speak about the development of the enterprise.
Work in progress depends more on the length of the production cycle, therefore, with a sharp increase in this component of working capital, it is first of all necessary to seek and eliminate the violation of the production process. Also, the amount of wages depends on the prices of resources, the increase of which will lead to a regular increase in "incomplete".
In some situations, the accumulation of inventory will be inevitable due to the seasonal nature of production or demand for products. Then, in one period, the enterprise works in a warehouse, so that in a favorable period, then quickly sell all the products.
Stock Investment Efficiency
It makes sense to invest in stocks only if they are effective. It is advisable to build up one or another component of reserves only when a profit is made on the funds invested in it.
The problems of inventory management devoted a whole direction in economic science. There are four ways to evaluate inventory management performance:
- Efficiency of use (such classical indicators as material output, material consumption, increase in work in progress are calculated).
- Provision with material stocks.
- Efficiency of investments in inventories.
- Summarizing the effectiveness of the entire inventory management system (customer satisfaction, costs of the inventory management process itself).
Inventory turnover
With the accumulation of stocks is closely related to the concept of their turnover. The speed with which the company accumulates and reduces its reserves affects the level of economic activity. The turnover cycle begins from the moment of procurement of material resources and ends with the receipt of money for products made from these resources. The more such cycles occur during the reporting period, the higher the business activity of the enterprise. The slowdown in turnover leads to a freeze of assets and necessitates the attraction of loans.
In many respects this characteristic depends on the type of assortment. For example, in the production and sales of food products and daily household goods, inventory turnover will be high, household appliances - less, cars - even less. After all, not every month and even a year people buy new cars. A quite understandable regularity is traced between the cost of the goods, the duration of the process of its manufacture, and the speed of stock turnover.
How to effectively use stocks?
In order for investment in reserves to justify itself, it is necessary to prevent, firstly, the accumulation of illiquid assets, and secondly, interruptions in production. Much here depends on a competent assortment policy and ways of working with customers. Only demanded goods will help to quickly unload warehouses and provide the company with stable revenue. To increase sales, a number of enterprises make certain concessions to customers, provide them with a commodity loan, deferred payment, etc. Often this helps, but care must be taken to ensure that there are no overdue debts, which are often impossible to repay even through the courts.