Chapter 6

Inventory Management
Inventory Management
-​ the process of ordering, storing, using, and selling a company's inventory.
-​ the development and administration of inventory policies, systems, and procedures
necessary to efficiently and satisfactorily meet inventory requirements at the minimum
cost possible.

Inventory
-​ Current assets that need to be physically counted or measured before it can be put on a
balance sheet.

Inventory Categories
●​ Raw Materials - various materials a company purchases for its production process.
●​ Work in Process (a.k.a. Goods in Process) - raw materials in the process of being
transformed into a finished product.
●​ Finished Goods - completed products readily available for sale
●​ Merchandise - finished goods a company buys from a supplier for future resale.

Inventory Management Methods

●​ Just In Time (JIT) - purchasing and keeping inventory on hand in an adequate amount
that they need to produce and sell within a certain time frame
●​ Economic Order Quantity (EOQ) - storing inventory on a constant amount based on an
assumed constant customer demand and only ordering additional amounts to keep the
inventory at a constant amount.
●​ Materials Requirement Planning (MRP) - sales-forecast dependent; ordering
anticipated inventory needs based on sales forecast in a timely manner
●​ Days Sales of Inventory (DSI) - financial ratio that indicates the average time to turn
inventory into sales

Division Heads and their Responsibilities in Manufacturing

1.​ Financial Manager - keeping inventory low and ensure that the firm’s money is not
spent in excessive purchasing of resources
2.​ Marketing Manager - ensuring high amounts of finished products
3.​ Production Manager - responsible for implementing the production plan to ensure
desired amounts of finished goods in acceptable quality to sell for low cost
4.​ Purchasing Manager - responsible for raw materials
Objectives of Inventory Management
1.​ To reduce inventories while maintaining customer service levels and quality.
2.​ To establish production and inventory control.

Things to Note in Inventory Management

●​ Control - set up proper control system to record physical movements of inventory
●​ Information - Information on inventory level must be properly communicated on time to
avoid stock out.
●​ Inventory Value - the value of stored items should reflect in the appropriate financial
statements

Chapter 7
Financial Forecasting
Forecasting
-​ looking at future sales, revenues, earnings, costs, and other potential factors that are
needed in the operations of the firm.
-​ Main Purpose: to lessen the risk of uncertainty of the firm for decision-making

Recipients of Forecast
1.​ Top People in the Organization - for setting long-range strategic objectives and making
capital budgeting decisions.
2.​ Production Manager - to access raw materials needed for production, the budget,
schedule of production activities, inventory levels, labor hours, and the schedule of
shipments.
3.​ Purchasing Manager - to ascertain the volume or bulk of materials that should be
purchased for a particular period to avoid overstocking or understocking
4.​ Marketing Manager - to estimate sales for a particular period and to plan promotional
and advertising activities
5.​ Finance Manager - to anticipate the funding needed by the firm and to establish the
firm's cash inflows and outflows.
6.​ Human Resource Manager - to utilizes the forecast to supply the human resource
needed in achieving the firm's objectives.
7.​ School Administrator - to identify possible enrollees in a school year.

Forecasting Approaches
1.​ Qualitative (Judgmental) - useful in formulating short - term forecasts and supplements
the projections made using any of the qualitative methods.
-​ Factors: intuition, emotion, personal experiences, value system
-​ Methods: expert opinion, sales force polling, consumer market survey
 2.​ Quantitative - adopt different mathematical models that rely on historical data and/or
casual variables.
3.​ Time Series Analysis - the process of analyzing data that's collected over time to
identify patterns, trends, and relationships in the data
-​ Kinds:
➢​ Trends - gradual upwards or downward movement of the data over time.
➢​ Seasonality - a data pattern that repeats itself after a period of days,
weeks, months, or quarters.
➢​ Cycle - a pattern of the data that happens every several years.
➢​ Random/Irregular Variations (Blips) - data caused by chance and not
ordinary situations.
4.​ Causal Forecasting - a data-driven technique that uses cause-and-effect relationships
to predict future outcomes.
-​ often used in retail to predict sales and demand

Types of Financial Forecasting

●​ Sales Forecasting
●​ Cash Flow Forecasting - cash inflows and outflows
●​ Budget Forecasting - revenues and expenses
●​ Income Forecasting

Use of Financial Forecasting

●​ Planning - to plan for future revenues, expenses, and capital needs
●​ Risk Management - to identify potential risks, opportunities, and challenges
●​ Budgeting - for annual budget process
●​ Decision-making - for policy and programmatic decisions

Chapter 8
Short-Term Financial Management
Short-term Financing
-​ a loan or line of credit that is repaid within one year.
-​ a way for businesses to get money quickly to cover expenses

Spontaneous Liabilities
-​ financing that arises from the normal course of business.
-​ obligations of a company that are accumulated automatically as a result of the firm's
day-to-day business.
Sources of Short-term Financing
●​ Trade Credit - buying of supplies and materials on credit
-​ Largest single category of short-term credit
●​ Commercial Bank Loans - appears as notes payable
-​ Second important source of short-term financing
-​ For short-term and intermediate-term
●​ Commercial Paper - selling of well-established firms’ promissory notes primarily to other
firms
●​ Secured Loans - “Most short-term business loans are unsecured, which means that an
established company’s credit rating qualifies it for a loan.”

Usage of Accounts Receivable and Inventories as Collateral

●​ Pledging - loan amount is the percentage of the face value of the receivables pledged
●​ Factoring - outright sale of accounts receivable to a factor

Sources of Short-Term Credits

●​ Unsecured Credit - short-term financing obtained without pledging specific assets as
collateral.
●​ Secured Funds - include additional security in the form of assets that are pledged as
collateral in the event the borrower defaults in payment of principal and interest.

Advantages of Short-term Credits

●​ Fast arrangement of short-term loans
●​ Increased flexibility
●​ Lower interest rates on short-term loans

Disadvantages of Short-term Credits

●​ Extra risk due to payment demand on short notice
●​ Increase in cost of loan due to increase of interest rate

Chapter 9
Business Plan
Business Plan
-​ a formal, written document that outlines a company's goals, strategies, and financial
projections, serving as a roadmap for business growth and development.
Components of a Business Plan
1.​ Executive Summary - a concise overview of a longer document, report, or proposal,
providing a snapshot of key points, findings, and recommendations to allow readers to
quickly grasp the main ideas and purpose.
-​ Typical Components of Executive Summary: purpose and context, key
findings, and results, conclusions and recommendations, problem statement, and
target audience
2.​ Company Description - a concise overview of the business, including its mission,
goals, products/services, unique features, and target market, essentially giving readers a
snapshot of what the company does and why it's different.
-​ Key Elements: mission statement, products/services, target market, unique
selling proposition (USP), company history, location, management team, legal
structure
3.​ Market Analysis - provides insights into potential customers and your competition.
-​ Methods:
➢​ Market Analysis - thoroughly research the industry, identify trends, and
analyze the competitive landscape.
➢​ Target Audience - Define the ideal customer profile (demographics,
psychographics, buying behaviors)
➢​ SWOT Analysis
4.​ Financial Projections - a company’s estimates, or forecasts, of its financial
performance at some point in the future. Information includes cash flow, income
statement, and balance sheet
5.​ Organizational Structure - outline of the company structure. It includes roles,
responsibilities, reporting lines, and decision-making processes, providing a blueprint for
how the business functions.
-​ Types of Structures:
➢​ Explanation of Organizational Structure (Hierarchical, flat, functional,
divisional, matrix)
➢​ Hierarchy and Reporting - levels of management and who reports to
whom
➢​ Roles and Responsibilities
➢​ Decision-Making - describe how decisions are made within the
organization (centralized or decentralized)