Final answer:
A very slow Inventory Turnover (ITO) can offer benefits like a broader selection for customers, but it often results in higher holding costs and potential cash flow problems. It tends to negatively affect Working Capital Requirement (WCR) and Quick Asset Ratio (QAR), indicating less liquidity and more capital tied up in inventory.
Step-by-step explanation:
The term ITO likely refers to Inventory Turnover which is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. The WCR refers to Working Capital Requirement, which is a measure of the amount of capital that a business needs to fund its day-to-day operations. QAR could refer to Quick Asset Ratio, also known as the Acid-test ratio, which measures the ability of a company to pay its current liabilities without relying on the sale of inventory.
Pros of a Very Slow ITO:
- Possibility of greater selection for customers
- Less frequent need to reorder stock, which could save on order costs
- May indicate holding of high-value or specialty items that turn over slowly
Cons of a Very Slow ITO:
- Risk of inventory obsolescence
- Higher holding costs, including storage, insurance, and taxes
- Potential cash flow problems due to capital tied up in inventory
The effect of a very slow ITO on WCR is typically negative as more capital is tied up in inventory, potentially increasing the need for working capital. Similarly, a very slow ITO can negatively impact the QAR, since it indicates that a smaller portion of the company's assets are liquid and thus may not be readily available to cover short-term liabilities.