Instructor: Now that we know more
about trade receivables,
it'll be great to concentrate
on the other major component of working capital
on the asset side, inventory.
This is the portion of assets that are ready
or will be ready to be sold.
And this is an important item for most businesses
because it predetermines the speed
with which clients can receive the goods they have ordered.
If a firm has the goods in stock in its warehouse,
it is all a matter of logistics
to distribute them to customers.
If it doesn't, the whole process is delayed significantly.
Having sufficient inventory is great.
However, having too much inventory can be problematic,
as inventory costs money and takes a lot of space,
which can be expensive too.
So that's definitely an item
that finance managers must keep their eye on
and try to optimize as much as possible.
Okay, depending on the business you are in,
your company can face three scenarios.
If you are a merchandiser, a wholesaler,
or a retailer company,
it is highly unlikely your firm will have anything
besides finished goods in its warehouse.
A company like Walmart shouldn't have items
different than finished goods in its inventory.
Manufacturers like P&G, Mars, and even Apple
have three components of inventory on stock,
raw materials they have purchased
but have not yet been elaborated,
work-in-progress goods, transformed in a certain way
but have not yet been completed,
and finished goods,
which are final products ready to be sold to customers.
In Apple's case, raw materials would be given
by semiconductor chips acquired externally
from companies like German chip maker,
Infineon Technologies, or US-based Intel.
Work-in-progress goods are iPhones
that have not been assembled completely.
Imagine an iPhone that has no screen, for example.
Finished goods will be iPhones
the way you see them sold to customers,
packaged and ready to be used once unpackaged.
Okay, I hope this makes sense.
Finally, there are companies that do not keep any inventory.
Service-based businesses like Facebook and FedEx
cannot keep any inventory,
and such an account wouldn't exist in their balance sheet.
Okay, so that's a great start.
In our next lesson, we'll talk about the relationship
between inventory and COGS,
and we'll try to describe the types of COGS
capitalized in inventory.
Thanks for watching.