Monday, June 29, 2009

Reduce Inventory Cash Position

What will happen if a  company reduces its inventory without adversely affecting sales? What kind of effect would this have on the company's cash position in the (1) short run and (2) in the long run? 

Accounting Answer:

If company can successfully reduce its inventories without affecting their overall sales,  the effect would be that the company has an increase in net working capital.  Having an increase in net working capital may help the company utilize their daily operations. For example, they will have an easier time paying the creditors, spending on regular expenses, utilities, etc.

However,  thinking long term, there are chances that company may get tied up huge working capital which may be used for some very profitable financing activities which of course will increase the profitability of company. For example, the company could invest in other companies or types of securities that provide it cash flow. Cash management is very important to a company and maintaining the ideal amount of net working capital is essential for an accountant to do. 

No comments:

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.