Economic order quantity

Understanding Economic Order Quantity

Economic Order Quantity (EOQ) is a formula used by businesses to determine the optimal number of units to order, with the aim of minimizing costs associated with inventory. These costs include storage space, ordering fees, and holding fees. EOQ helps a company reduce the expenses that come with overstocking and understocking.

EOQ's Role in Financial Factoring

In the context of financial factoring, Economic Order Quantity can play a crucial role. Financial factoring is a financing method where a business sells its accounts receivable to a third party (called a factor) at a discount. For businesses that use factoring, maintaining the right inventory levels is key to ensuring cash flow stability. By calculating EOQ, a business can keep inventory levels in check, avoiding excessive investment in stock, which could impact the cash available for factoring.

How to Calculate EOQ

EOQ is calculated by taking the square root of: (2DS/H), where D stands for demand in units (typically annual), S for ordering cost per order, and H for holding cost per unit, per year. Though this formula may seem complex, it serves as a strategic tool to manage inventory efficiently.

Benefits of EOQ

Economic Order Quantity offers multiple benefits for businesses. It optimizes the order quantity for inventory, minimizes holding and ordering costs, improves cash flow management, and supports better organization of warehouse space. When combined with financial factoring, EOQ enables companies to maintain liquidity by preventing funds from being tied up in unnecessary stock.

EOQ in Simple Terms

Put simply, Economic Order Quantity helps businesses find the sweet spot for their inventory purchases. It tells them how much to order to keep costs low and avoid wastage. When businesses have a balanced inventory, they can better harness the power of financial factoring to fuel their growth and manage day-to-day operations.