#Immediacy on speech making

Although the businessperson is well aware of the money he pays out ...

Although the businessperson is well aware of the money he pays out to buy raw materials and other supplies, he can easily overlook the cost of holding them. It is even easier to underestimate the cost of holding semi-finished goods and finished goods. The cost of storing any item will include what the accountants refer to as 'opportunity cost'. That is the cost of not using the equivalent money in some other form of investment. In other words, one can choose between spending£12,000 on raw materials and, say, putting the money in a building-society account to earn interest.

The opportunity cost of holding the stock of raw materials is the interest that would have been earned if the money had been invested in the, building society. So long as a stock of anything is held, it must be considered as losing the money which could have been gained by taking the other opportunity.

However, there are few businesses which can operate with no stocks at all, even if they only comprise office stationery, and many require considerable quantities.

The objective should be to keep the quantity to a minimum. Let us suppose that a business normally has a stock of raw materials, spare parts, etc, amounting to £120,000 in value. Let us also suppose that the company has borrowed £110,000 at 12 per cent from the bank. If the stocks could be reduced by 50 per cent, what would be gained? Two opportunities present themselves.

Firstly, if the liquidity of the business can be increased by £110,000 as a result of the stock reduction, then the bank loan could be paid off. This would save 12 per cent of £110,000 per annum £11,200 per annum. Alternatively, the £110,000 could be invested at, say, 8 % to yield £1800 p.a. It is equally likely that the cash could be used in some other way, such as hiring more labour, renovating machinery, an online advertising campaign, or whatever else the business needs to expand and, hopefully, become more profitable.

The only possible advantage which can result from overstocking is that the goods held increase in value at a rate greater than the opportunity cost.

This does sometimes happen but riot very often, and is normally a ...

This does sometimes happen but riot very often, and is normally a plucky 'accident'. The other costs Apart from the opportunity costs, there are ot... read more

With a 100-carton consumption the first load would be ordered for delivery ...

With a 100-carton consumption the first load would be ordered for delivery at the beginning of week 1, and this would last to the end of week 3, to be followed by an... read more

In some cases the nature of the business severely limits the choice ...

In some cases the nature of the business severely limits the choice of location a retailer stores his goods at least to some extent.

at his shop an