This lesson focuses on the management of inventory and accounts payable, two critical components of the working capital cycle.

• Inventory Management: Holding inventory is necessary for smooth operations, but it also ties up cash. The objective of inventory management is to balance the risk and cost of holding inventory against the need to meet demand .

• Inventory Management Techniques: A range of tools and techniques can be used to optimize inventory levels. These include:

  • ABC Analysis: Categorizing inventory based on value and importance.

  • Economic Order Quantity (EOQ) Model: Determining the optimal order quantity to minimize total ordering and holding costs.

  • Various Classification Systems: HML, XYZ, VED, FSN, SDF, GOLF, and SOS classifications are used for different analytical purposes .

• Accounts Payable Management: Trade credit, the financing provided by suppliers, is a significant source of short-term funds . Managing accounts payable involves decisions on payment terms and whether to take advantage of cash discounts.

  • Trade Credit: Provides advantages such as convenience, lower costs, and flexibility .

  • Stretching Accounts Payable: Delaying payments can improve cash flow but may damage supplier relationships and increase costs .