Question

Too much inventory on hand

a. increases the losses due to price declines

b. increases the cost to safeguard the assets

c. ties up funds that could be used to improve operations

d. All of these choices are correct.

Answer 1

All of these choices are correct.

a. Companies that keep up with buying trends might find overstocking inventory to be a disadvantage. Consumer tastes change quickly and products can become outdated if they sit around in inventory for a few months, particularly when it comes to clothing and other fashion items. In these cases, a warehouse full of trendy product quickly becomes a warehouse full of devalued product.

b. Storage capacity and the related storage fees are a concern for companies holding more inventory than is needed. It takes space and resources to hold inventory. Companies lose profit by paying labor for maintaining the storage space, organizing the stock and transporting the stock from one place to another. Companies that rent storage space lose additional profit by paying rental fees to store unused stock.

c. The more money you have tied up in inventory, the less you'll have to cover essential daily expenses such as rent and payroll. You might be able to get better prices on inventory by buying in volume, and your production may be more efficient when you produce more inventory and achieve economies of scale.

But cash-flow shortfalls can easily wipe out these advantages. If you end up short of cash, you might need to borrow money, and then you'll need to pay interest and finance charges just to make ends meet. And if you then become short on capital because you've spent it all on excess inventory, you might then be unable to take advantage of opportunities that require capital outlay.