The world of business can be characterized by the great complexity of relations involved. The possibility for one concept to mean different things for a business entity also adds to this complexity. Inventory, as an integral part of business, can also be considered dually, i. e. as asset or as liability, and respectively can affect the company’s performance differently.
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The case of Cameron Balloons is not new in the world of business as dealing with inventories actually poses a serious problem to management (Krajewski, Ritzman, and Malhotra, 2009, p. 119). The sum of one and a quarter million pounds, as stated about the inventories of the company, is rather significant if the monthly employee payment of ₤4,000 is taken for comparison. But if the total forecasted revenue is compared to the inventories, the sum of ₤1,275,768 looks insignificant in relation to the expected ₤18,669,000 in revenues. Similarly, the stated sum of inventories can be treated as assets if return on sales is considered. However, if the management is concerned about the return on investment, the allegedly excessive inventories can be liabilities in fact (Atrill, 2009, p. 237).
As the new Cameron Balloons outside director is concerned about the capital investment of the company, the mentioned inventories sum is the liability for Cameron Balloons. Respectively, functioning as an asset the inventory can facilitate the company’s development and protect it from numerous risks. In Cameron Balloons’ case, inventories as the liability hinder the company’s development and only mean additional storage and maintenance costs (Atrill, 2009, p. 284). At the same time, the figure of ₤1,275,768 is not atypical for inventories as it varies from company to company and is based on its sales, revenues, expenses, and future projection. Therefore, Cameron Balloons does not have to worry about the allegedly excessive assets, especially in the light of the expected total revenue of over ₤18 million.
Products and Services
One more important consideration is the types of inventories Cameron Balloons holds to support the production of its balloons, medical products, and spare parts for respective balloons. Basically, the inventories are defined as the raw materials, spare parts, and completed goods or services ready for sale and considered to be the integral part of the firm’s assets (Krajewski, Ritzman, and Malhotra, 2009, p. 138).
Drawing from this, the essential part of Cameron Balloons inventories, i. e. spare parts for balloons, are at the same time the company’s products that are sold monthly. As Cameron Balloons sells spare parts for the sum equaling 20% of the balloons sold for the same period, 20% of the allegedly excessive inventory is also eliminated and transformed into the monthly and annual revenue. So, in the light of the forecasted total revenue of ₤18+ million, it would be not reasonable for Cameron Balloons to artificially cut its inventories transforming them into cash. Such a step accompanied by the scheduled sale of 20% of the inventories in form of spare parts for balloons might leave the company unprotected from supply shortages and urgent order manufacturing situations.
As a result, it is obvious that inventories can be both assets and liabilities for business companies depending on the purposes for which inventories are, or are planned to be, used. In Cameron Balloons’ situation, inventories are liabilities, but the fact that about 20% of the inventories are at the same time company’s goods should stop Cameron Balloons’ management from groundless and dangerous cutting of inventories.
Krajewski, Lee, Larry Ritzman & Manoj Malhotra. Operations Management: Processes and Supply Chains. Prentice Hall, 2009. Print.
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Atrill, Peter. Management accounting for decision makers. FT/Prentice Hall, 2009. Print.