By Michael Firth (auth.)
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4) Trends or comparisons of ratios should be computed. For example, a stock turnover of 12 is only either good or bad when measured against some yards tick such as the ratio in prior years or periods or against other companies. If any trend has taken an 36 Management oJ Working Capital unexpected direction or reached an unexpected level, then the reasons for this should be investigated. (5) Very great care should be exercised in using inter-company ratios, especially those with different year ends (and even more care should be taken if the business is seasonal - indeed, inter-company ra ti os may be quite useless in this case).
Another method of ordering is the 'two bin' and 'three bin' systems. 6 usage being kept. Opening the sealed bin, however, gives the signal for a replenishment order. This method is cheap as it does not entail continuous monitoring and is easy to understand - it has therefore gained a fair amount of acceptance. There are also other types of system in use known as the 'min-max' or '8-s' method; these are described in the specialised inventory-control textbooks. t does not require a continuous monitoring of stock levels and is therefore cheaper to operate.
Shareholders, potential investors and creditors all use the annual accounts to appraise the company and the inventory ratios are likely to be amongst their analyses. By anticipating outside reaction the company may be able to ameliorate any adverse comments if the ratios appear 'bad', by issuing various explanations. Chapter 6 deals more fully with investor and creditor confidence in relation to ratios. INVENTORY DECISION MODELS The two main decisions that have to be made by management are what amounts of stock should be ordered and how often to make an order.