An effective purchasing and inventory system is mandatory. If
purchasing is made haphazardly and the inventory is not managed
properly, the business could face major losses.
While making these decisions, consider the hidden costs of
keeping too much inventory on hand. These costs will include:
- Financing costs: The interest expense associated with the
- Opportunity costs: Alternative income producing use of
money tied up in inventory
- Insurance costs: Insurance costs will increase if more
inventory is carried
- Storage costs: This cost is applicable if the space to
store the inventory is leased or purchased.
- Obsolesce cost: The loss of sales that occur when new and
improved models are introduced and consumers no longer want the
“old” items in your inventory.
- Shrinkage costs: Loss due to breakage, damage, spoilage or
theft of your inventory.
For the above reasons, having a huge inventory can be very
costly. Having a small inventory on the other hand results in frequent
buying. This also turns out very costly.
Therefore, there should be some optimum number of units one
should purchase per order. To find out what this optimum number of
units is, use the following formula:
- EOQ : is the “economical order
quantity” or the optimum quantity to purchase per order
- S : is the estimated annual sales
- V : is the variable costs to place an order
- I : is the inventory holding costs as a percentage of
- C : is the cost of one item
Using this formula, you can find the quantity of units one
should purchase every time the inventory is to be replaced.
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Table Of Contents
- How to start
a company? – Introduction
Is your new business idea “really” that brilliant?
How to make a “perfect” business plan? &
Why make one?
Business plan - Step 1 – Understanding your business!
- Step 2
– What do “you” want? (Personal
- Step 3
– How to form business objectives? & Why?
4 – How to make the “right” business
Making the right legal decisions
Making the right production decisions
Making the right hiring decisions
Making the right inventory decisions
Making the right marketing decisions
- Step 5
– Estimating the capital required
- Step 6
– How to “draft” the perfect business
How to raise the capital required for your business?