Factors Affecting The Size Of Investment In Inventories Or Determinants Of Inventories

The size of investment in inventories is affected by a number of factors. Some of them are as follows:

1. Level Of Safety Stock
If a firm maintains high level of safety stock because of relatively larger degree of uncertainty associated to production and sales, the size of investment in inventories is also higher.

2. Carrying Costs
If the costs of holding inventories in stock is relatively low, the firm keeps larger stocks of inventories.

3. Economy in Purchase
If the firm is likely to receive certain benefits in the form of cash discount for purchase made currently, the size of investment in inventories is also likely to be larger because of larger quantity purchase.

4. Possibility Of Price Rise
If the price of materials is likely to rise in near future, the firm makes larger quantity purchase at present.

5. Cost And Availability Of Funds
If the cost of funds to be invested in inventories is relatively cheaper and they are conveniently available at present, the firm makes large purchase of inventories.

6. Possibility Of Rise In Demand
If the firm has anticipated the increased demand of its products in future, it maintains larger stocks of inventories at present.

7. Length Of Production Cycle
If the length of production cycle is relatively longer, the firm has to maintain investment in work-in-progress inventories for longer duration of time as a result of which the size of investment in inventories increases.

8. Availability Of Material
If certain kind of materials are only available in a particular season only, the firm has to increase the investment in inventories to keep larger stocks in the season.

9. Nature And Size Of Business
If the firm deals with the business of perishable products, the size of investment in inventories become lower. For a firm with relatively larger size and wide market coverage, the investment in inventories is larger.