Answer to Question #219684 in Accounting for Alexis peters

Question

what factors are likely to reduce the holdings of inventory in relation to sales in the future? What factors will tend to increase the ratios and what in your judgement is the net effects?

Answer 1

Solution:

The factors that are likely to reduce the holdings of inventory in relation to sales in the future include the following:

1.). Financial factors such as cost of borrowing funds, expenses related to inventory management, and tax costs can greatly influence the holdings of inventory in relation to future sales. When the costs of holding inventory are higher, you will be forced to reduce your inventory levels.

2.). Supplier’s availability and reliability can greatly influence the holding of inventory. When you have a reliable, predictable, and dependable supplier, you can reduce your inventory holdings since you can always request them when shortages arise.

3.).  Lead time can influence the holdings of inventory. This is the time it takes from the moment an item is ordered to the moment it arrives. When the lead time is shorter, you can reduce the holdings of inventory since you can easily order them and have them delivered quickly when there are inventory shortages.

4.). Product type can also influence the holdings of inventory. When you stock perishable items which expire quickly, you have to reduce their holdings of inventory to have them spoiling when in large quantities.

5.). External factors such as economic downturn or recession may affect future sales and hence the need to reduce holdings of inventory to avoid excess inventory due to lack of sales.

 

The factors that will tend to increase the ratios include the following:

1.). Increase in earnings and sales will lead to an increase in the ratios.

2.). Increase in operating and net margins will lead to an increase in the ratios.

3.). Decrease in debt levels will lead to an increase in the ratios.

4.). Macro conditions prevailing in the market will lead to an increase in the ratios.

 

The net effects of an increase in ratios can lead to an increase in profits, risks, liquidity levels, and increase in growth levels.