Better inventory management means fluid and liquid assets

Inventories are a component of the firm's working capital.

Inventories represent a current asset. Some characteristics are important in the broad context of working capital management, along with the including:

- The Current Asset: It is assumed that inventories will be converted to cash in the current accounting cycle, which is normally, one year. In some cases, this is not entirely true, for example, a vintner may require that the wine be aged in casks or bottles for many years. In spite of these and similar problems, we will view all inventories as being convertible into cash in a single year. Better inventory management means not having to tell the customer you are sold out or out of stock.


 - The Level of Liquidity: Inventories are viewed as a source of near-all cash. For most products, this description is accurate. At the same time, most firms hold some slow-moving items that may not be sold for a long time. With economic slowdowns or changes in the market for goods, the prospects for sale of entire product lines may be diminished. In these cases, the liquidity aspects of inventories become highly important to the manager of working capital. At a minimum, the analyst must recognize that inventories are the least liquid of current assets.