5.5.4 The impact of inventory management on liquidity

• What does inventory management involve?

  Planning and controlling inventory
• Liquidity is the measure of how quickly a business can convert its assets into cash
• Maintaining sufficient liquidity is crucial for avoiding financial distress.
• Match the inventory level with its impact on liquidity:

  High Inventory ↔️ Low Liquidity

  Low Inventory ↔️ Potentially Low Liquidity

  Optimal Inventory ↔️ High Liquidity
• Order the factors affecting liquidity based on high inventory levels:

  1️⃣ Capital Tied Up

  2️⃣ Increased Storage Costs

  3️⃣ Risk of Obsolescence

  4️⃣ Slower Cash Conversion
• Too little inventory can indirectly reduce liquidity by disrupting sales and customer service.
• Inventory Management involves planning and controlling inventory from ordering to storage and eventual sale
• What improves a company's liquidity in inventory management?

  Converting inventory into cash
• Match the inventory management aspect with its characteristic:

  Efficient Inventory Management ↔️ Optimized to meet demand

  Inefficient Inventory Management ↔️ Excessive stock levels
• Liquidity is a key indicator of a company's ability to meet short-term obligations.
• The formula for calculating the liquidity ratio is Liquidity = Current Assets / Current Liabilities</latex>
• What are the risks associated with high inventory levels in terms of liquidity?

  Capital tied up and obsolescence
• Low inventory levels can lead to stock-outs and lost sales, affecting liquidity negatively.
• What is meant by high inventory levels?

  Substantial stock relative to sales
• What is one negative effect of higher stock levels on a business's profitability?

  Increased storage costs
• Goods stored in inventory may become obsolete if they cannot be sold.
• How does high inventory affect the ability to meet short-term obligations?

  Slower cash conversion
• High inventory reduces current assets, resulting in lower liquidity
• What is meant by high inventory levels in relation to sales volume?

  Substantial amount of stock
• Large inventories tie up capital that could be used for other investments or operational needs.
• What is the impact of slow cash conversion on a business's short-term obligations?

  Difficulty in meeting them
• What is the primary issue associated with low inventory levels?

  Missed sales
• Lack of availability due to stock-outs can damage a company's reputation.
• Match the inventory level with its impact on liquidity:

  Low ↔️ Can lower liquidity

  High ↔️ Reduces liquidity

  Optimal ↔️ Increases liquidity
• Optimal inventory levels help maintain a healthy turnover rate
• Effective inventory management ensures inventory is quickly converted into cash.
• What is one characteristic of efficient inventory management regarding storage costs?

  Minimal storage costs
• In efficient inventory management, the conversion to cash is quick
• How does efficient inventory management affect a company's liquidity?

  High liquidity
• Using just-in-time inventory management can reduce storage costs and improve cash flow.
• Liquidity measures how quickly a business can convert its assets into cash
• Match the aspect of liquidity with its description:

  High Liquidity ↔️ Ample and readily available cash flow

  Low Liquidity ↔️ Struggles to meet obligations
• What is the formula for calculating the liquidity ratio?

  $Current Assets / Current Liabilities$
• A company with high liquidity has robust cash flow
• A company with low liquidity has ample cash flow.

  False
• Match the type of liquidity with its characteristic:

  High Liquidity ↔️ Ample and readily available cash flow

  Low Liquidity ↔️ Limited and difficult to access cash flow
• The liquidity ratio is calculated as current assets divided by current liabilities
• What does a liquidity ratio of 2 indicate for a company?

  High liquidity
• Inventory is directly related to a company's liquidity.
• What happens to liquidity when inventory levels are high?

  It decreases