Inventory period and operating cycle

Age of inventory will show the number of days that inventory of COSCO is being held before they are sold. Increasing or decreasing the same must be a guided by the objective of maintaining a good working capital condition. COSCO Wholesale has inventory period of 27 days. Before recommendation could be made whether its inventory period should be increased, said inventory period must be compared with the payment terms with suppliers.

If the company’s payment terms (Bernstein, 1993) to supplier is 30 days them the age of inventory of 27 days is a good sign that the company is making sale of inventory efficiently, which means that it can sell faster than the next time the company orders and pays for these goods.

For COSCO to maintain its 27 days inventory period, it must also tie this up with collection period since higher sales volume is normally associated with longer collection period.

Increasing sales on credit with longer collection will decrease inventory period and the two will sum up to operating cycle (Meigs and Meigs, 1995).

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If the resulting operating cycle still allows a good and manageable working capital situation, then increasing sales on credit must be done up to such point, otherwise mismanaged working could turn the company unable to meet currently maturing obligations. Operating Cycle COSCO’S operating cycle is 30 says which consists of 27 days inventory period and 3 days collection period.

To determine whether recommendations should be made whether the cycle could be increased or decreased should be tied up on it working capital situation.

If its present working capital situation allows the company to meet it currently maturing obligations then its operating cycle is just right. As discussed earlier, the strategy on operating cycle is affected by decisions made on age of inventory and policy on making sales on credit.

One could not just decrease operating cycle without basis like by decreasing age of inventory by underinvestment as this could mean not satisfying the demand for company’s products for the sake of shorter age of inventory and consequently shorter operating cycle. The company’s policy on sales on credit must be sufficient enough to meet realistic targets in terms of sales revenues and working capital requirements (Brigham and Houston, 2002).