Businesses should maintain an adequate amount of inventory level. The level of inventory mainly depends upon many factors which need to be considered by the business units. They are explained below:
Inventory turnover: Measures how quickly inventory is sold. It is calculated by dividing the cost of sales by the average inventory.
Nature of business: Different businesses have varying inventory requirements based on their industry and operations.
Production economies: Businesses strive for cost-effective production processes, which influence inventory management.
Nature of products: Consider the characteristics of products, such as perishability or durability, to determine appropriate inventory strategies.
Inventory costs: Maintaining a balance between inventory level and cost is crucial for business profitability.
Financial soundness: The financial health of a business impacts inventory management decisions.
Operating cycle: The time required to complete business activities affects inventory management. Capital requirements and operational efficiency should be considered.
Management attitude: Effective inventory management relies on supportive leadership that actively participates in developing inventory policies and strategies.