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 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 PAGG 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 U.S. based intel work in progress goods our iPhones
that have not been assembled completely.
Imagine an iPhone that has no screen for example.
Finished goods will be I-phones the way you see them sold to customers packaged and ready to be used
once unpackaged.
Ok 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.