August 14, 2020

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The Inventory Management Model By Baumol

The cash inventory management model was created by an expert named Baumol. Baumol identified that the need for cash in a company is similar to the use of inventory. That is, if the company has a cash balance in a company that has a high cash balance, the company will suffer losses in the form of lost opportunities to invest these funds in other investment opportunities that are more profitable. Conversely, if the cash balance is too low, the possibility of the company experiencing liquidity difficulties is even greater because there should be a balance. The same problem occurs with supplies. In the meantime, if your company requires a professional bookkeeper, we recommend you call bondi junction xero bookkeeper.

This is a simple example of a case:

The online bookstore Retail Books faces the demand for book A which is always the same every time. For example, a book order is 240 units in one year, and the bookstore orders Q units each time it orders. Thus the frequency of orders in one year is:

Sales: Number of Orders = 240 / Q
Inventories held by the company will range from 0 to Q units.
Thus the average inventory of the book is

Average Inventory = (Q / 2) unit
If the annual storage costs are stated as i, the annual storage costs will be borne by the company as follows.

Storage Cost Per Year = (Q / 2) i
If the number of book requests is 240 units we give a notation D, and each time the Retail Books order requires a fee of o, then the cost of ordering in one year is:

Ordering Fee in One Year = (D / Q) o
Thus the total inventory cost in one year (for example, we give Y notation) as follows.

Y=(Q/2) i+(D/Q)o

This fee must be minimized. Therefore, the equation above we derivate with Q and we make the SAME with zero (0).

(oD / Q²) = (i / 2)
iQ² = 2oD
Q = [(2oD) / i)] 1 / ²
With the same logic it can be applied as a way of managing company cash.