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- 1. 16 Assets: Inventory and Operations Management McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
- 9. Chapter 16 Inventory Costs 16-
Editor's Notes
- Answer: b
- Offering credit is tricky for small businesses. By extending credit the owner is taking on an additional financial risk. Pros and cons of offering credit are shown on the next slide.
- Eventually, if you offer credit, someone will not pay. Trying to recover these costs either in small claims court or by turning it over to a collection agency takes time and costs money. Either method should be carefully considered.
- Rather than offering credit to any customer, you must have policies in place for decided who is to receive credit and who is not. Standard poloicies include: Send out bills immediately Collect within 30 days Charge interest on late payments
- Example Offering Credit to New Customers How do I determine if a customer is creditworthy? Three things you can do to make sure you don't get burned: Check credit references Learn more from the major credit bureaus Consider products and services from D&B (Dun and Bradstreet) If a company or individual has no credit history, or if what they have is unfavorable, tell them you'll consider granting credit only after successfully doing business with them over a period of time
- Inventory will also absorb cash. Most small companies try to keep minimal inventory on hand without running out of anything. A lost sale not only is lost profit, but the customer may not return.
- Answer: a
- JIT was developed for manufacturing companies in order that they might keep raw materials levels down. JIT requires smaller, more frequent deliveries, and a good relationship with your supplier.
- Example Controlling Your Inventory I yo-yo between having too much of my product in stock and not enough. How can I find a better system for controlling my inventory? Depends on how big your operation is Numerous inventory software programs that specialize in keeping track of inventory and the costs that go with them Many companies employ what’s called a just-in-time inventory strategy, in which they have a solid relationship with a supplier who can fill inventory needs virtually as fast as you’re filling orders
- Periodic Inventory may be counted frequently, or not so frequently. A physical hand count of inventory is time consuming. Some companies inventory all assets once per year. Other inventory a sample every quarter. Perpetual Inventory is very common and is simply recording your sales. An accounting system such as Quickbooks, as discussed in an earlier chapter, will do this automatically as sales receipts are entered.
- Your assets are not just the physical items but the money that can be made from them. A hair dresser might have $100 in scissors, combs, and curling irons at her station, but can make several hundred dollars in a day by using them.
- Book value starts at the cost of the original item. Many larger items, such as vehicles, are depreciated on a set schedule such as 5 years.
- There are different accounting methods for determining inventory value. If you can buy an item for $5 and sell it for $10, is it worth $5 or $10?
- There are several costs to acquiring an asset. The cost of owning a vehicle includes not just the loan payment payment, but interest on the loan, insurance, tax, title, and licensing. Also, the money you tie up in a vehicle is not able to be used for anything else and thus there is an opportunity cost.
- Assets also have costs of operating. Every time you use the company truck you also use gas and bring it closer to its next maintenance need. Some assets are also hard to get rid of. Waste from chemical plants is very difficult and expensive to dispose of properly.
- Capital budgeting is the process of creating a strategy to your spending. What is it we need? What items are most necessary? Do we need a company car or is it better to pay employees mileage on their vehicles? Payback and ROI are discussed on the next set of slides.
- Two decision rules are on the next slide.
- Payback does simplify the process but in doing so often results in less than perfect decisions.
- Like Payback, ROI ignores the time value of money. Additionally, Profits are not the same as cash flow. However, while all methods have imperfections, ROI seems to work well for a majority of companies.
- Another questions small business owners face is whether to rent or buy. Many times, buying is not optimal to a new entrepreneur who isn’t sure the business will succeed. Renting provides an easy way out if necessary.
- However, if you rent, you have nothing to show in the long run. And the cost to rent is normally higher than the cost to own, that’s how the landlord makes his money.
- Operating leases are another form of renting, usually on a much longer term. Capital leases are similar to private financing and are thus expensive. Leases also have more restriction than if you were buying the building with financing from the bank.
- Joint ventures are shared ownership. While rarely used, it is used in special places such as airplane which would not be used on a daily basis.