Why is an understanding of inventory management useful for cash management?

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Why is an understanding of inventory management useful for cash management?



Answer: Cash is simply a raw material - like inventories of other goods - that you need to do business. Capital that is tied up in large inventories of any raw material rather than earning interest is expensive. So why do you hold inventories at all? Why not order materials when you need them? The answer is that placing many small orders is also expensive. The principles of optimal inventory management and optimal cash management are similar.

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