Inventories Management And Inter-Corporate Investments: Strategies For Success

Inventory management is a critical aspect of the supply chain, involving the tracking of inventory from manufacturers to warehouses and eventually to the point of sale. It requires inventory visibility, knowledge of when and how much to order, and where to store stock. Effective inventory management aims to have the right products in the right place at the right time, balancing the risks of inventory shortages and gluts. On the other hand, inter-corporate investments refer to any investment a company makes in another company. This can include purchasing shares, acquiring debt, or buying securities of another company. Inter-corporate investments are typically accounted for based on the percentage of ownership stake, which can be classified as minority passive, minority active, or controlling interest.

Inventory management methods: just-in-time (JIT), materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI)

Inventory management is the process of ordering, storing, using, and selling a company's inventory. This includes raw materials, components, and finished products, as well as the warehousing and processing of these items. There are several methods of inventory management, each with its own advantages and disadvantages, catering to the specific needs of a company. Here is an overview of four commonly used inventory management methods: just-in-time (JIT) management, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI).

Just-in-Time (JIT) Management

Just-in-time (JIT) inventory management is a strategy where companies aim to receive the exact amount of inventory they need, right when they need it, with minimal excess inventory. This approach was pioneered by Taiichi Ohno of Toyota in the 1970s to reduce costs and improve efficiency. JIT management reduces warehousing costs, minimises waste, and makes it easier for companies to pivot to new products. However, it is susceptible to supply chain disruptions and requires careful tracking of inventory to ensure materials arrive on time.

Materials Requirement Planning (MRP)

Materials requirement planning (MRP) is a software-based integrated inventory and supply management system. MRP helps companies estimate the quantities of raw materials needed, maintain optimal inventory levels, and schedule production and deliveries. By using sales forecasts and detailed sales records, manufacturers can ensure that materials are available when needed, reducing customer lead times and improving satisfaction. However, MRP relies heavily on accurate input data and can be expensive to implement.

Economic Order Quantity (EOQ)

Economic order quantity (EOQ) is a model used in inventory management to determine the ideal order quantity a company should purchase to minimise inventory costs, such as holding costs, shortage costs, and order costs. The EOQ model ensures that the right amount of inventory is ordered per batch, reducing the frequency of orders and preventing excess inventory. The EOQ formula takes into account setup costs, demand rate, and holding costs. However, it assumes constant consumer demand, which may not account for unpredictable business events or seasonal changes in demand.

Days Sales of Inventory (DSI)

Days sales of inventory (DSI) is a financial ratio that indicates the average time in days it takes for a company to turn its inventory, including work in progress, into sales. DSI represents the liquidity of the inventory and the average number of days a company's current stock will last. Generally, a lower DSI is preferred, as it indicates efficient inventory management and faster turnover. A high DSI may suggest poor inventory management or difficult-to-sell inventory. DSI is a useful metric for analysts and investors to assess a company's efficiency in managing its inventory relative to its competitors.

Inventory investment: the difference between goods produced and sold in a given year

Inventory investment is a component of gross domestic product (GDP). The difference between goods produced (production) and goods sold (sales) in a given year is known as inventory investment. This concept is generally applied in macroeconomics, but it can also be applied to individual firms.

The formula for inventory investment is:

> Inventory investment = production – sales

A positive inventory investment per unit time occurs when production per unit time exceeds sales per unit time. Conversely, if production is less than sales, inventory investment per unit time is negative.

Inventory investment can be either intended or unintended. A positive flow of intended inventory investment occurs when a firm expects sales to be high and builds up its inventories to meet demand. Conversely, a firm will engage in negative intended inventory investment if it decides that its current level of inventories is too high.

Positive or negative unintended inventory investment occurs when customers buy a different amount than the firm expected during a particular time period. If customers buy less than expected, inventories build up and unintended inventory investment is positive. If customers buy more than expected, inventories decline and unintended inventory investment is negative.

Inventory investment is important in understanding business cycle fluctuations. A typical business cycle might play out as follows:

• There is a sustained increase in spending by some group, which leads to negative unintended inventory investment as sales exceed production.
• Firms engage in positive intended inventory investment to build up their inventories to meet demand. This results in a boom in the economy.
• There is a sustained decline in spending, leading to positive unintended inventory investment as inventories are too high.
• Firms engage in negative intended inventory investment by deliberately producing less than what is demanded, leading to a downturn in the economy.
• There is a sustained increase in spending, leading to negative unintended inventory investment as inventories are too low.
• The cycle begins again.

Inventory investment is also important in understanding a company's financial health. A low inventory turnover ratio may indicate weak sales or excess inventory, while a high ratio may indicate strong sales but also potentially inadequate inventory stocking.

Inventory financing: a way to borrow money to purchase inventory, often through short-term loans

Inventory financing is a way for businesses to borrow money to purchase inventory, often through short-term loans. It is a form of asset-based financing, where the inventory itself serves as collateral for the loan. This means that businesses may not need to rely on their business or personal credit history and assets to qualify for the loan.

Inventory financing can be particularly useful for small to medium-sized businesses that are inventory-heavy and may not have access to other financing options. It can help them manage cash flow, update product lines, increase inventory supplies, and respond to high customer demand.

There are two types of inventory financing: inventory loans and lines of credit. Inventory loans function like traditional term loans, where the borrower receives a specific amount of capital and repays it with interest over a fixed period. Lines of credit, on the other hand, provide businesses with revolving credit, giving them regular access to credit as long as they make regular payments.

While inventory financing can be a good option for businesses that need to purchase inventory, there are also some disadvantages. Lenders may not offer the full amount required to purchase inventory, and interest rates and fees can be high. Additionally, businesses that are new or struggling may find it challenging to repay the loan, leading to further financial strain.

Inter-corporate investments: loans, investments, guarantees, and securities between two companies

Inter-corporate investments refer to the financial relationships between two separate corporate entities. This can include loans, investments, guarantees, and securities. These inter-corporate investments are often governed by a set of regulations, such as Section 186 of the Companies Act, 2013, which outlines the provisions for inter-corporate loans and investments.

A company can provide loans, investments, guarantees, and securities to another corporate entity with the consent of its board or shareholders. This is known as an inter-corporate loan or investment. There are, however, restrictions on the maximum amount that can be loaned or invested, typically not exceeding 60% of its paid-up share capital, free reserves, and security premium account, or 100% of its free reserves and security premium account, depending on which is more.

If the aggregate amount of inter-corporate loans, investments, guarantees, and securities is within the specified limit, the transaction can be processed with a board resolution and the consent of all directors. However, if it exceeds the limit, a prior special resolution must be passed, and approval from a financial institution must be obtained if there is an existing term loan.

Inter-corporate loans are exempt from the provisions of Section 186 for certain types of companies, including banking companies, insurance companies, housing finance companies, and companies established to provide infrastructure or finance industrial enterprises.

Companies must also disclose specific details about inter-corporate loans or investments in their financial statements, including the amount, purpose, and proposed usage by the recipient.

The process of providing inter-corporate loans involves several steps, including board meetings, passing resolutions, checking for existing loans, determining fund sources and quantum, and maintaining registers.

Violations of the regulations regarding inter-corporate loans and investments can result in penalties for both the company and its directors.

Restrictions on inter-corporate investments: a company cannot provide loans or guarantees exceeding 60% of its paid-up share capital and reserves

Inventory management is the process of ordering, storing, using, and selling a company's inventory, including raw materials, components, and finished products. It is a crucial part of business operations and can be done manually or through specialised software.

Now, concerning inter-corporate investments, Section 186 of the Companies Act, 2013, outlines the restrictions on inter-corporate loans and investments. This section states that a company cannot provide loans, guarantees, or acquire securities of another body corporate exceeding 60% of its paid-up share capital, free reserves, and securities premium account. Alternatively, it can lend up to 100% of its free reserves and securities premium account, if this amount is higher. This restriction aims to maintain a healthy balance sheet and prevent excessive risk-taking by companies.

To further elaborate, a company must obtain approval from its board of directors before providing any loans, guarantees, or investments. Additionally, if the aggregate value of such transactions exceeds the prescribed limit, a special resolution must be passed, and prior approval from a financial institution is required if the company has an existing term loan. The rate of interest for inter-corporate loans must also be higher than the prevailing yield of government securities with similar maturity.

Furthermore, companies that have defaulted on repayment of deposits or interest are prohibited from providing inter-corporate loans or guarantees until the default is resolved. The penalty for contravening these regulations includes a fine ranging from Rs. 25,000 to Rs. 5,00,000, and imprisonment of up to 2 years and an additional fine for defaulting officials.

In summary, the restrictions on inter-corporate investments are designed to maintain financial stability and protect the interests of all parties involved. Companies must carefully adhere to these regulations to avoid legal consequences and ensure sustainable business practices.

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