Answer to Question #304827 in Management for Mercy Bwalya

Question

C.Explain how efficient inventory management affects the risk, liquidity and

profitability of the firm

Answer 1

Effective inventory management means that a company has a successful system for ordering, tracking, storing, and selling their stock.

Effective inventory management reduces most of the risk associated with company stock. For example, properly stored goods in a warehouse with an up to date security system are less likely to be stolen, and if stolen, can be quickly recovered.

Effective inventory management also gives a company steady liquidity. The company's stock, assuming that production and supply are not affected by extraneous circumstances, will not run out. A company with effective inventory management can forsee a shortage and find a way to create more product so that it does not run out.

Consequently, this ensures profitability of the company because there is a constant supply of product to the market. Establishing such a standard makes the product and or company reliable to the market, hence the likelihood of sustained profitability.