[ashs2]

Ahh I'm stuck on this question for my accounting assignment :(
If a company were to foresee cash problems in the future so it decides to take the action of reducing inventory levels what would be the advantages and disadvantages of this question?

[Just Looking]

For advantages, think in terms of cost savings - financing, storage cost, obsolescense, etc. For disadvantages, think in terms of not having enough inventory to meet demand. For a real life case study, look at Dell and the way they handle inventory. You can Google it and it will give you some good ideas to start.

[teeeee]

There are some advantages and disadvantages to reducing the inventory levels of an outlet store. An advantage could be the reduced costs involved in carrying lower volume of inventory. Holding more inventory than necessarily needed may mean the costs of storage and storage space. This could be more valuable to an outlet store by the possibility of freeing up space for the shop and increasing its ability to generate revenues. Financing is also another advantage that could be had. Since the outlet store is reducing levels of inventory it is reducing the levels of finance that would otherwise have been involved in the purchase of that inventory. And since inventory is not a “quick” asset, reducing this and increasing cash levels would mean an increase in the acid test ratio of the outlet store. This could mean that the company would have more cash assets and a greater ability to meet short-term obligations.
However there are also disadvantages involved. If the outlet store was to reduce levels of inventory there is a possibility of future shortages due to an unexpected increase in future demand an error in the projection in future demand. Shortages are opportunities of sales forgone. This would have otherwise been an opportunity for the outlet store to improve its cash flow problems that it may face during the next 6 months. Keeping lower levels of inventory could also mean that the outlet store could not get the cost advantages of buying in larger quantities. This would mean that the cost of its inventory will be greater, and due to natural inflation levels and particularly if the prices of its stock rise in the next 6 months, this will mean that they are paying more for their inventory in the long-run. Reduced levels of inventory remove the possible benefits of bulk discounts.