Inventory finance
Inventory management, and thus the inventory finance, is the most crucial aspect for running any organization profitably. Inventory, comprises of firm's working capital, becomes assets for the company. The affairs of inventory finance are too complex, as lots many parameters are taken into account for there health. All inventory items are supposed to convert into cash within the current accounting cycle itself.
The inventory finance rotates around four basic types of inventories such as work-in process inventory, finished goods inventory, stores and spares, and raw material inventory. Every company must have a robust finance management system in position ensuring replenishing inventory finance regularly else, working of the company may come to a standstill. Inventory Finance And its Classifications Any inventory finance can broadly be discussed under the following main areas of responsibility.
Cash Credit -
Under cash credit inventory finance management, a customer is allowed to borrow up to the cash credit limit, which is a pre-fixed limit set by the respective companies and may change from time to time as per the company's financial development. Interest is charged against cash credit amounts only for the money actually having being consumed.
Overdraft -
It is just like cash credit inventory finance arrangement, in which overdraw is permitted for the customers, but only up to a pre-fixed limit. Such limit is once again, set by the company and may change frequently. Security in the form of shares, insurance policies and other similar collaterals are asked against any overdraft inventory finance.
Purchasing And Discounting of Bills -
Inventory finance of this category is managed either by availing any bank's offer of outright purchase or by discounting the bills generated out of sale of finished products.
Letter of Credit -
Letter of credit inventory finance is guaranteed by a bank in favor of its customers to pay for the goods purchased, in case its customers do not pay company within the stipulated period after purchasing the product.
Commercial Paper and factoring -
These are another means of dealing with inventory finance, whereby large reputable companies do issue short-time promissory notes with fixed maturity time to generate required money. Factoring is nothing, but some sort of agreement between a fund intermediary, namely factor and a seller of products or services. Managing Inventory Finance Managing inventory finance in highest befitting fashion and is most crucial to achieve desired success in business. Every company must have dedicated inventory finance management department to look after issues pertaining to well beings of inventory and economic growth of the company. Better inventory finance is mandatory for the following events among other business interests Sailing business towards maximum optimization of resources and higher profits.
An ideal inventory finance system should be flexible enough to accommodate any unforeseen exigencies. Non-availability of inventory must not become a constraint for productions. Increasing of assets, capital and stocks. Any inventory finance should focus on increasing of companys assets and other capital goods. Expanding customer base. Effective inventory finance should accumulate new customers without losing any of its existing support bases. Besides, it also should spell out the detailed responsibilities for accepting seasonal orders. Inventory finance should be designed in such a way, so that it does not spell doom in any emergency or at the time of peak seasonal needs. Cash flow should be smooth and persuasive.
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