The eff icient management of i nventor y (a l s o k nown as “stock”) levels can free up working capital and is an important area where a manufacturing or trading business can raise capital from itself by being more operationally efficient. Note that whereas all businesses have debtors and creditors, most but not all businesses carry inventory.
To help understand the detail of inventory, it’s worth revisiting the cash conver- sion cycle: a manufacturing business buys raw materials which it then improves using the production process until they are ready for sale. During this time the inventory (if correctly recorded) would move through the categories of “raw materials”, to “work in progress” and finally “finished goods”. A trading business typically buys finished goods from someone else, holds these products as stock and tries to sell them as quickly as possible. Either way, the core point is that as long as the firm has items