Working

Capital
Management
Prepared by:
Cabahug, Vankia Guiang, Genie

Caballero, Mica Quialatan, Quiarah

Cristobal, Angelo Relator, Aleah

De Leon, Jenna Luz Clarita Roxas, Jason

Espeleta, Risha Vargas, Jesica

Submitted to:
Ma’am Topacio
Working Capital Management

MEANING:
Working capital is an easily understandable concept, as it is linked to an individual’s cost of
living and, therefore can be understood in a more personal way. Individuals need to collect the
money that they are owed and maintain a certain amount on a daily basis to cover day-to-day
expenses, bills, and other regular expenditures.

A business uses working capital in its daily operations; working capital is the
difference between a business's current assets and current liabilities or debts. Working capital
serves as a metric for how efficiently a company is operating and how financially stable it is in
the short-term. The working capital ratio, which divides current assets by current liabilities,
indicates whether a company has adequate cash flow to cover short-term debts and expenses.

Working capital management involves the relationship between a firm’s short-term assets
and its short-term liabilities. In a broader view, ‘working capital management’ includes working
capital financing apart from managing the current assets and liabilities. That adds the
responsibility for arranging the working capital at the lowest possible cost and utilizing the
capital cost-effectively.

DEFINITION:
According to Tuovila (2019), working capital management is a business strategy
designed to ensure that a company operates efficiently by monitoring and using its current assets
and liabilities to the best effect. The primary purpose of working capital management is to enable
the company to maintain sufficient cash flow to meet its short-term operating costs and short-
term debt obligations.

Based on Borad (2018), the term ‘working capital management’ primarily refers to the
efforts of the management towards effective management of current assets and current liabilities.
Working capital is nothing but the difference between the current assets and current liabilities. In
other words, an efficient working capital management means ensuring sufficient liquidity in the
business to be able to satisfy short-term expenses and debts.

Divestopedia defined the Working Capital Management as the management of short-term

liabilities and short-term assets. The process is used continuously to operate and generate cash
flow to meet the need for short-term obligations and daily operational expenses. Working capital
management is an extremely important area of consideration when selling a mid-market
business. Effective working capital management means that business owners will maintain
working capital levels as low as possible while still having an adequate amount to run the
business. At the point of sale, a buyer will look at historical levels to determine an appropriate
amount of non-cash working capital to leave in the business post acquisition. The vendor will
usually be able to remove excess cash from the business prior to sale.

KEY TAKEAWAYS:
Looking over the working capital management includes the control and supervision of its
four (4) components which are; (1) Cash Management (2) Inventory Management (3) Payable
Management and (4) Receivable Management, which will be discussed thoroughly later on.

Working capital management system often uses key performance ratios, such as the
working capital ratio, the inventory turnover ratio and the collection ratio, to help identify areas
that require focus in order to maintain liquidity and profitability.

1. Working Capital Ratio – also known as the current ratio is a liquidity ratio that
measures a firm’s ability to pay off its current liabilities with current assets. The
working capital ratio is important to creditors because it shows the liquidity of the
company.

Current liabilities are best paid with current assets like cash, cash equivalents, and
marketable securities because these assets can be converted into cash much quicker
than fixed assets. The faster the assets can be converted into cash, the more likely the
company will have the cash in time to pay its debts.

The reason this ratio is called the working capital ratio comes from the working
capital calculation. When current assets exceed current liabilities, the firm has enough
capital to run its day-to-day operations. In other words, it has enough capital to work.
The working capital ratio transforms the working capital calculation into a
comparison between current assets and current liabilities.

FORMULA: Working Capital Ratio = Current Asset ÷ Current Liabilities

2. Collection Ratio – ratio of a company’s accounts receivable to its average daily

sales. The collection ratio is the average number of days it takes the company to
convert receivables into cash. It is also called average collection period.

The collection ratio is a measure of how efficiently a company manages its accounts
receivables. The collection ratio is calculated as the product of the number of days in
an accounting period multiplied by the average amount of outstanding accounts
receivables divided by the total amount of net credit sales during the accounting
period.
 It provides the average number of days it takes a company to receive payment after a
sales transaction on credit. If a company's billing department is effective at
collections attempts and customers pay their bills on time, the collection ratio will be
lower. The lower company’s collection ratio, the more efficient is its cash flow.

FORMULA: Collection Ratio = Number of Days × Total Receivables ÷ Average Sales

3. Inventory Ratio – The final element of working capital management is inventory

management. It helps the company in knowing that how many times a certain
company has to replace or sell the stock within a time frame and the same is
calculated by dividing the average inventory from the total cost of goods sold.

To operate with maximum efficiency and maintain a comfortably high level of

working capital, a company must keep sufficient inventory on hand to meet
customers' needs while avoiding unnecessary inventory that ties up working capital.

Companies typically measure how efficiently that balance is maintained by

monitoring the inventory turnover ratio. The inventory turnover ratio, calculated as
revenues divided by inventory cost, reveals how rapidly a company's inventory is
being sold and replenished. A relatively low ratio compared to industry peers
indicates inventory levels are excessively high, while a relatively high ratio may
indicate inadequate inventory levels.

FORMULA: Inventory Ratio = Cost of goods sold ÷ Average Inventory

FUNCTION:
The following are the functions of working capital management:

1. Monitoring – to ensure that a firm is able to continue its operations and that it has
sufficient ability to satisfy both maturing short-term debt and upcoming operational
expenses.

2. Management – looking over the current assets and liabilities includes the
management of working capital components such as inventories, accounts receivable
and payable, and cash.
 3. Control – to maintain the working capital operating cycle and ensure its ordered
operation to minimize the cost of money spent on working capital and maximizes the
return on investment.
4. Efficiency – another function of working capital management is to maximize
operational efficiency. An efficient working capital management maintains smooth
operations and is improving over time. It also helps to improve the company's
earnings and profitability.

5. Metric – working capital is a prevalent metric for the efficiency, liquidity and overall
health of a company. It is a reflection of the results of various company activities,
including revenue collection, debt management, inventory management and payments
to suppliers.

SIGNIFICANCE:
Working capital is a daily necessity for businesses, as they require a regular amount of
cash to make routine payments, cover unexpected costs, and purchase basic materials used in the
production of goods.

Working capital management is essentially an accounting strategy with a focus on the

maintenance of a sufficient balance between a company’s current assets and liabilities. An
effective working capital management system helps businesses not only cover their financial
obligations but also boost their earnings.

Proper management of working capital is essential to a company’s fundamental financial

health and operational success as a business. A hallmark of good business management is the
ability to utilize working capital management to maintain a solid balance between growth,
profitability and liquidity.

CONCLUSION:
Working capital management is a business strategy designed to ensure that a company
operates efficiently by monitoring and using its current assets and liabilities to the best effect.
The primary purpose of working capital management is to enable the company to maintain
sufficient cash flow to meet its short-term operating costs and short-term debt obligations.

The needs for working capital vary from industry to industry, and they can even vary
among similar companies. This is due to several factors, including differences in collection and
payment policies, the timing of asset purchases, the likelihood of a company writing off some of
its past-due accounts receivable, and in some instances, capital-raising efforts a company is
undertaking.
 When a company does not have enough working capital to cover its obligations, financial
insolvency can result and lead to legal troubles, liquidation of assets, and potential bankruptcy.
Managing working capital means managing inventories, cash, accounts payable and accounts
receivable.

Although numbers vary by industry, a working capital ratio below 1.0 generally indicates
that a company is having trouble meeting its short-term obligations. That is, the company's debts
due in the upcoming year would not be covered by its liquid assets. In this case, the company
may have to resort to selling off assets, securing long-term debt, or using other financing options
to cover its short-term debt obligations.

Working capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0
may suggest that the company is not effectively using its assets to increase revenues. A high ratio
may indicate that the company is not securing financing appropriately or managing its working
capital efficiently.
Cash Management
 The process of collecting and managing cash flows.
 Also known as treasury management refers to the process of collection, management, and
usage of cash flows for the purpose of maintaining a decent level of liquidity and it
involves financial instruments such as treasury bills, certificate of deposit and money
market funds making the same substance for not just individuals but organizations too.
 It is a process in which the cash is collected, disbursed and invested so that there is
maximum liquidity.

Understanding Cash Management

Cash is the primary asset individuals and companies use to pay their obligations on a
regular basis. In business, companies have a multitude of cash inflows and outflows that must be
prudently managed in order to meet payment obligations, plan for future payments, and maintain
adequate business stability. For individuals, maintaining cash balances while also earning a
return on idle cash are usually top concerns.

In corporate cash management, also often known as treasury management, business

managers, corporate treasurers, and chief financial officers are typically the main individuals
responsible for overall cash management strategies, cash related responsibilities, and stability
analysis. Many companies may outsource part or all of their cash management responsibilities to
different service providers. Regardless, there are several key metrics that are monitored and
analyzed by cash management executives on a daily, monthly, quarterly, and annual basis.

The cash flow statement is a central component of corporate cash flow management.
While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually
maintained and tracked internally on a daily basis. The cash flow statement comprehensively
records all of a business’s cash flows. It includes cash received from accounts receivable, cash
paid for accounts payable, cash paid for investing, and cash paid for financing. The bottom line
of the cash flow statement reports how much cash a company has readily available.

Types of Cash Management

Following are the types given below:

Cash Flow from Operating Activities: It is found on the cash flow statement of an
organization and it does not include cash flow from investing. Free Cash Flow to Equity:

Free Cash Flow to Equity represents the amount of cash that is available after the
capital is reinvested.

Cash Flow to The Firm: It is used for the purpose of valuation and financial modeling.
 Net Change in Cash: It refers to the movement in the total amount of cash flow from a
particular accounting period to another.

Significance
Cash management can be important for both individuals and companies.

 In business, it is a key component of a company's financial stability.

 individuals, cash is also essential for financial stability while also usually considered as
part of a total wealth portfolio.
 Cash management also helps in maximizing profitability by optimizing cash utilization.
Its also helps in creating provisions for future contingencies such as economic slowdown,
bad debts, etc.

Individuals and businesses have a wide range of offerings available across the financial
marketplace to help with all types of cash management needs. Banks are typically a primary
financial service provider for the custody of cash assets. There are also many different cash
management solutions for individuals and businesses seeking to obtain the best return on cash
assets or the most efficient use of cash comprehensively.

FUNCTION OF CASH MANAGEMENT

Cash management is required by all kinds of organizations irrespective of their size, type and
location. Following are the multiple managerial functions related to cash management:

 Investing Idle Cash: The company needs to look for various short term investment
alternatives to utilize surplus funds.
 Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow is
an essential function of the business.
 Planning of Cash: Cash management is all about planning and decision making in terms
of maintaining sufficient cash in hand and making wise investments.
 Managing Cash Flows: Maintaining the proper flow of cash in the organization through
cost-cutting and profit generation from investments is necessary to attain a positive cash
flow.
 Optimizing Cash Level: The organization should continuously function to maintain the
required level of liquidity and cash for business operations.
Receivables Management

Definition:
 Receivable management is the process of making decisions relating to investment in trade
debtors. Certain investment in receivables is necessary to increase the sales and the
profits of the firm.
 The receivables out of the credit sales crunch the availability of the resources to meet the
day today requirements. The acute competition requires the firm to sustain among the
other competitors through more volume of credit sales and in the intention of retaining
the existing customers. This requires the firm to sell more through credit sales only in
order to encourage the buyers to grab the opportunities unlike the other competitors they
offer in the market.
 Involves much more than reminding customers to pay.
 It is also about identifying the reason for non-payment.
 Aspect of a firm's current assets management, which is concerned with determining
optimum credit policy associated to a firm.

Objectives:
 The main objective in Accounts Receivable management is to minimize the Days Sales
Outstanding (DSO) and processing costs while maintaining good customer relations.
Account receivable management determines the charges before sending bill of product
and services they provide.
 To maximize the return on investment in receivables
 To maximize the sales to the extent the risk involved remains within the acceptable limit
 Maintaining up-to-date record
 Accurate billing
 Establish the credit policies

Significance
 Receivables management directly contributes to a company’s profit because it reduces
bad debt. The company also has a better cash flow and higher available liquidity for use
in investments or acquisitions. Furthermore, good receivables management boosts a
company’s professional image.
 Credit policies help to meet the competition.
 Credit sales help to attract not only existing customers but also the new customers.
 It gives guidance to the management for effective financial planning and control.
  It helps to make effective coordination between finance, production, sales, profit and
cost.

Function
 To evaluate the creditworthiness of customers before granting or extending the credit
 To minimize the cost of investment in receivables.
 To minimize the possible bad debt losses.
 To formulate the credit terms in such a way that results into maximization of sales
revenue and still maintaining minimum investment in receivables.
 To minimize the cost of running credit and collection department.
 To maintain a trade-off between costs and benefits associated to credit policy
Inventory Management Definition

o Inventory
 is the term for the goods available for sale and raw materials used to produce goods
available for sale. Inventory represents one of the most important assets of a business
because the turnover of inventory represents one of the primary sources of revenue
generation and subsequent earnings for the company's shareholders.
 Inventory represents a current asset since a company typically intends to sell its
finished goods within a short amount of time, typically a year. Inventory has to be
physically counted or measured before it can be put on a balance sheet. Companies
typically maintain sophisticated inventory management systems capable of tracking
real-time inventory levels. Inventory is accounted for using one of three methods: first-
in-first-out (FIFO) costing; last-in-first-out (LIFO) costing; or weighted-average
costing.

 An inventory account typically consists of four separate categories:

 Raw materials
o Raw materials represent various materials a company purchases for its
production process. These materials must undergo significant work before a
company can transform them into a finished good ready for sale.
  Work in process
o Works-in-process represent raw materials in the process of being transformed
into a finished product.
 Finished goods
o Finished goods are completed products readily available for sale to a company's
customers.
 Merchandise
o Merchandise represents finished goods a company buys from a supplier for
future resale.

Inventory Management Significance

Inventory management is the fundamental building block to longevity. When your

inventory is properly organized, the rest of your supply-chain management will fall into place.
Without it, you risk a litany of mistakes like mis-shipments, out of stocks, overstocks, mis-picks,
and so on. Proper warehouse management is key. Mis-picks result from incorrect paper pick
lists, disorganized shelf labels, or just a messy warehouse in general. Mis-shipments are a direct
result of mis-picks at the beginning of the inventory process, and are also a result of a lack in
quality control procedures. Out of stocks and overstocks occur when a company uses manual
methods to place orders without having a full grasp on the state of their inventory. This is a not a
good predictor for inventory forecasting and results in too much stock or too little. All of these
mistakes will not only cost you money, but also cost you in wasted labor spent correcting the
mistakes later. When you don’t implement management tools, your risk of human error mistakes
goes up by the minute. And your customer reviews and loyalty take a negative hit as well.

A company's inventory is one of its most valuable assets. In retail, manufacturing, food
service, and other inventory-intensive sectors, a company's inputs and finished products are the
core of its business. A shortage of inventory when and where it's needed can be extremely
detrimental. At the same time, inventory can be thought of as a liability (if not in an accounting
sense). A large inventory carries the risk of spoilage, theft, damage, or shifts in demand.
Inventory must be insured, and if it is not sold in time it may have to be disposed of at clearance
prices—or simply destroyed.

For these reasons, inventory management is important for businesses of any size.
Knowing when to restock certain items, what amounts to purchase or produce, what price to
pay—as well as when to sell and at what price—can easily become complex decisions. Small
businesses will often keep track of stock manually and determine the reorder points and
quantities using Excel formulas. Larger businesses will use specialized enterprise resource
planning (ERP) software. The largest corporations use highly customized software as a service
(SaaS) applications.
 A good inventory management software reviews the state of supply and demand, the
movement of items and delivery times. The inventory management is supposed to ensure
customer satisfaction with minimal costs. Good reporting and analytical views are essential for
inventory management.

Inventory Management Functions

 to provide maximum supply service, consistent with maximum efficiency and optimum
investment
 to provide cushion between forecasted and actual demand for a material
 tract inventory
 how much to order
 when to order
 An effective inventory management should:
 Ensure a continuous supply of raw materials to facilitate uninterrupted production
 Maintain sufficient stocks of raw materials in periods of short supply and
anticipate price changes
 Minimize the carrying cost and time
 Control investment in inventories and keep it at an optimum level

Inventory Management Methods

Depending on the type of business or product being analyzed, a company will use various
inventory management methods.

 Just-in-Time Management
o Just-in-time (JIT) manufacturing originated in Japan in the 1960s and 1970s;
Toyota Motor Corp. (TM) contributed the most to its development. The method
allows companies to save significant amounts of money and reduce waste by
keeping only the inventory they need to produce and sell products. This approach
reduces storage and insurance costs, as well as the cost of liquidating or
discarding excess inventory.
o JIT inventory management can be risky. If demand unexpectedly spikes, the
manufacturer may not be able to source the inventory it needs to meet that
demand, damaging its reputation with customers and driving business toward
competitors. Even the smallest delays can be problematic; if a key input does not
arrive "just in time," a bottleneck can result.
 Materials Requirement Planning
o The materials requirement planning (MRP) inventory management method is
sales-forecast dependent, meaning that manufacturers must have accurate sales
records to enable accurate planning of inventory needs and to communicate those
 needs with materials suppliers in a timely manner. For example, a ski
manufacturer using an MRP inventory system might ensure that materials such as
plastic, fiberglass, wood, and aluminum are in stock based on forecasted orders.
Inability to accurately forecast sales and plan inventory acquisitions results in a
manufacturer's inability to fulfill orders.
 Economic Order Quantity
o The economic order quantity (EOQ) model is used in inventory management by
calculating the number of units a company should add to its inventory with each
batch order to reduce the total costs of its inventory while assuming constant
consumer demand. The costs of inventory in the model include holding and setup
costs.
o The EOQ model seeks to ensure that the right amount of inventory is ordered per
batch so a company does not have to make orders too frequently and there is not
an excess of inventory sitting on hand. It assumes that there is a trade-off between
inventory holding costs and inventory setup costs, and total inventory costs are
minimized when both setup costs and holding costs are minimized.
 Days Sales of Inventory
o Days sales of inventory (DSI) is a financial ratio that indicates the average time in
days that a company takes to turn its inventory, including goods that are a work in
progress, into sales.
o DSI is also known as the average age of inventory, days inventory outstanding
(DIO), days in inventory (DII), days sales in inventory or days inventory and is
interpreted in multiple ways. Indicating the liquidity of the inventory, the figure
represents how many days a company’s current stock of inventory will last.
Generally, a lower DSI is preferred as it indicates a shorter duration to clear off
the inventory, though the average DSI varies from one industry to another.
 Qualitative Analysis of Inventory
o There are other methods used to analyze a company's inventory. If a company
frequently switches its method of inventory accounting without reasonable
justification, it is likely its management is trying to paint a brighter picture of its
business than what is true. The SEC requires public companies to disclose LIFO
reserve that can make inventories under LIFO costing comparable to FIFO
costing.
o Frequent inventory write-offs can indicate a company's issues with selling its
finished goods or inventory obsolescence. This can also raise red flags with a
company's ability to stay competitive and manufacture products that appeal to
consumers going forward.
 THE ECONOMIC ORDER QUANTITY

Definition

Economic order quantity (EOQ) is the ideal order

quantity a company should purchase to minimize inventory
costs such as holding costs, shortage costs, and order costs.

This production-scheduling model was developed in

1913 by Ford W. Harris and has been refined over time. The
formula assumes that demand, ordering, and holding costs all
remain constant.

Economic Order Quantity Formula

It is calculated by minimizing the total cost per order by setting the first-order derivative
to zero.

The key notations in understanding the EOQ formula are as follows:

Components of the EOQ Formula:

D: Annual Quantity Demanded

Q: Volume per Order

S: Ordering Cost (Fixed Cost)

C: Unit Cost (Variable Cost)

H: Holding Cost (Variable Cost)

i: Carrying Cost (Interest Rate)

Derivation of E.O.Q. Formula

Ordering Cost

The number of orders that occur

annually can be found by dividing the annual
demand by the volume per order. The formula can
be expressed as:

For each order with a fixed cost that is

independent of the number of units, S, the annual
ordering cost is found by multiplying the
number of orders by this fixed cost. It is
expressed as:

Holding Cost

Holding inventory often comes with its own costs.

This cost can be in the form of direct costs incurred by financing the
storage of said inventory or the opportunity cost of holding inventory instead
H = iC
of investing the money elsewhere.

 With the assumption that demand is constant, the quantity of stock can be seen to be
depleting at a constant rate over time.
 When inventory reaches zero, an order is placed and replenishes inventory as shown:
As such, the holding cost of the inventory
is calculated by finding the sum product
of the inventory at any instant and the
holding cost per unit. It is expressed as
follows:

Total Cost and the Economic Order Quantity

Summing the two costs together gives the annual total cost of orders. To find the optimal
quantity that minimizes this cost, the annual total cost is differentiated with respect to Q. It is
shown as follows:

Example

For example, a company faces an annual demand of 2,000 units. It costs the company $1,000 for
every order placed and $250 per unit of the product. It faces a carrying cost of 10% of a unit cost. What is
the economic order quantity?The variables can be arranged as follows:
The cost for each value of Q is shown as:

EOQ Table

EOQ Chart
Example of How to Use EOQ

EOQ takes into account the timing of reordering, the cost incurred to place an order, and
the cost to store merchandise.

If a company is constantly placing small orders to maintain a specific inventory level, the
ordering costs are higher, and there is a need for additional storage space.

Assume, for example, a retail clothing shop carries a line of men’s jeans, and the
shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold a pair of
jeans in inventory, and the fixed cost to place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding
cost) or 28.3 with rounding. The ideal order size to minimize costs and meet customer
demand is slightly more than 28 pairs of jeans. A more complex portion of the EOQ formula
provides the reorder point.

The determination of EOQ consists of the following assumptions:

1. The EOQ will be determined for every product individually in a business.

2. Annual requirement (Demand) for product in units is known with certainty.
3. Ordering cost is known and constant throughout the year.
4. Inventory handling cost is known and constant throughout the year. Notably, if the
handling cost of an item is given as the percentage of price of the item, the unit price of
the item remains same throughout the year.
5. No cash or quantity discount is allowed.
6. The ordered quantity of the product is delivered at once as a single batch.
7. Immediate replenishment of ordered quantity on time (No delay and stock shortage).
8. Constant lead time is only allowed (no fluctuation is permitted)
Function & Significance

EOQ is needed because inventory is expensive. It’s expense to manufacture or procure

and it’s expensive to keep in stock. Whether it is raw materials, Work in Process (WIP) or
Finished Goods, companies can use EOQ as an efficient ordering guideline to prevent shortages
while not maintaining excess inventories. Economic Order Quantity is often one of many
inventory planning techniques available in an inventory control or ERP solution. Other
techniques include Reorder Points, Period of Supply, etc.

Limitations of Using EOQ

The EOQ formula assumes that consumer demand is constant. The calculation also
assumes that both ordering and holding costs remain constant. This fact makes it difficult or
impossible for the formula to account for business events such as changing consumer
demand, seasonal changes in inventory costs, lost sales revenue due to inventory shortages,
or purchase discounts a company might realize for buying inventory in larger quantities.

Conclusion

The EOQ is very useful tool for inventory control it may be applied to finished goods
inventories, work-in-progress inventories and raw material inventories. It regulates the purchase
and storage of inventory in such a way so as to maintain an even flow of production at the same
time avoiding excessive investment in inventories.
Inventory Control Systems
Inventory control systems are technology solutions that integrate all aspects of an
organization’s inventory tasks, including shipping, purchasing, receiving, warehouse storage,
turnover, tracking, and reordering. While there is some debate about the differences between
inventory management and inventory control, the truth is that a good inventory control system
does it all by taking a holistic approach to inventory and empowering organizations to utilize
lean practices to optimize productivity and efficiency along the supply chain while having the
right inventory at the right locations to meet customer expectations.

That being said, there are two different types of inventory control systems available
today: perpetual inventory systems and periodic inventory systems. Within those systems, two
main types of inventory management systems – barcode systems and radio frequency
identification (RFID) systems – used to support the overall inventory control process:

Main Inventory Control System Types:

 Perpetual Inventory System

 Periodic Inventory System

Types of Inventory Management Systems within Inventory Control Systems:

 Barcode System
 Radio Frequency Identification (RFID) System

Inventory control systems help you track inventory and provide you with the data you
need to control and manage it. No matter which type of inventory control system you choose,
make sure that it includes a system for identifying inventory items and their information
including barcode labels or asset tags; hardware tools for scanning barcode labels or RFID tags;
a central database for all inventory in addition to the ability to analyze data, generate reports, and
forecast demand; and processes for labeling, documenting, and reporting inventory along with a
proven inventory methodology like just-in-time, ABC analysis, first-in, or first out (FIFO), or
last-in-first-out (LIFO).

Inventory control systems, such as inventory control apps, offer a variety of functions
that help companies manage various types of inventory. Inventory control systems typically
consist of inventory management apps paired with barcode tagging to identify inventory assets,
and information about each item is stored in a central database. Barcode labels serve as inventory
trackers, allowing users to bring up information about the item on a computer system, such as the
item’s price, the number of items in stock, the location of an item within a warehouse, and more.
The 2 Types of Inventory Control Systems
Perpetual Inventory System

When you use a perpetual inventory system, it continually updates inventory records and
accounts for additions and subtractions when inventory items are received, sold from stock,
moved from one location to another, picked from inventory, and scrapped. Some organizations
prefer perpetual inventory systems because they deliver up-to-date inventory information and
better handle minimal physical inventory counts. Perpetual inventory systems also are preferred
for inventory tracking because they deliver accurate results on a continual basis when managed
properly.

There are some challenges associated with perpetual inventory systems. First, these
systems cannot be maintained manually and require specialized equipment and software that
results in a higher cost of implementation, especially for businesses with multiple locations or
warehouses. Periodic maintenance and upgrades are necessary for perpetual inventory systems,
which also can become costly. Another challenge of using a perpetual inventory system is that
recorded inventory may not reflect actual inventory as time goes by because they do not conduct
periodic physical inventory counts, a necessary activity even when inventory trackers are used.
The result is that errors, stolen items, and improperly scanned items impact the recorded
inventory records and cause them not to match actual inventory counts.

Periodic Inventory System

Periodic inventory systems do not track inventory on a daily basis; rather, they allow
organizations to know the beginning and ending inventory levels during a certain period of time.
These types of inventory control systems track inventory using physical inventory counts. When
physical inventory is complete, the balance in the purchases account shifts into the inventory
account and is adjusted to match the cost of the ending inventory. Organizations may choose
whether to calculate the cost of ending inventory using LIFO or FIFO inventory accounting
methods or another method; keep in mind that beginning inventory is the previous period’s
ending inventory.

There are a few disadvantages of using a periodic inventory system. First, when physical
inventory counts are being completed, normal business activities nearly become suspended. As a
result, workers may hurry through their physical counts because of time constraints. Periodic
inventory systems typically don’t use inventory trackers, so errors and fraud may be more
prevalent because there is no continuous control over inventory. It also becomes more difficult to
identify where discrepancies in inventory counts occur when using a periodic inventory control
system because so much time passes between counts. The amount of labor that is required for
periodic inventory control systems make them better suited to smaller businesses.
 Barcode Inventory Systems

Inventory management systems using barcode technology are more accurate and efficient
than those using manual processes. When used as part of an overall inventory control system,
barcode systems update inventory levels automatically when workers scan them with a barcode
scanner or mobile device. The benefits of using barcoding in your inventory management
processes are barcode scanner numerous and include:

 Accurate records of all inventory transactions

 Eliminating time-consuming data errors that occur frequently with manual or paper
systems
 Eliminating manual data entry mistakes
 Ease and speed of scanning
 Updates on-hand inventory automatically
 Record transaction histories and easily determine minimum levels and reorder quantities
 Streamline documentation and reporting
 Rapid return on investment (ROI)
 Facilitate the movement of inventory within warehouses and between multiple locations
and from receiving to picking, packing, and shipping

Radio Frequency Identification (RFID) Inventory Systems

Radio frequency identification (RFID) inventory systems use active and passive
technology to manage inventory movements. Active RFID technology uses fixed tag readers
throughout the warehouse; RFID tags pass the reader, and the movement is recorded in the
inventory management software. For this reason, active systems work best for organizations that
require real-time inventory tracking or where inventory security has been an issue. Passive RFID
technology, on the other hand, requires the use of handheld readers to monitor inventory
movement. When a tag is read, the data is recorded by the inventory management software.
RFID technology has a reading range of approximately 40 feet with passive technology and 300
feet with active technology.

RFID inventory management systems have some associated challenges. First, RFID tags
are far more expensive than barcode labels; thus, they typically are used for higher value goods.
RFID tags also have been known to have interference issues, especially when tags are used in
environments with a lot of metal or liquids. It also costs a great deal to transition to RFID
equipment, and your suppliers, customers, and transportation companies need to have the
required equipment as well. Additionally, RFID tags carry more data than barcode labels, which
means your system and servers can become bogged down with too much information.
When choosing an inventory control system for your organization, you first should decide
whether a perpetual inventory system or periodic inventory system is best suited to your needs.
Then, choose a barcode system or RFID system to use in conjunction with your inventory control
system for a complete solution that will enable you to have visibility into your inventory for
improved accuracy in scanning, tracking, recording, and reporting inven
Distribution of Work:

Working Capital Management – Vargas

Cash Management – Cabahug and Relator

Receivable Management – De Leon and Espeleta

Inventory Management – Guiang and Quilatan

Economic Order Quantity – Caballero and Roxas

Inventory Control System - Cristobal