Advantages And Disadvantages Of Working Capital Budgeting

The ability for a company to pay currently maturing debts from periodic operations is determined by the cash flow from operations to current liabilities. To calculate this ratio you

this ration is: Rate of Return on Net Sales equals Net Income divided by Net Sales. A high or

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company 's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company 's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company 's short-term liquidity. The quick ratio measures a company 's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Current Ratio: Current ratio helps the company assess its ability to use assets like cash, accounts receivable, inventory and the ability to pay short term liabilities as the accounts payable and wages. The ratio can be found by dividing the current assets /the current liabilities. Year 12 shows a ratio of 1.78 with year 11 a ratio of 1.86. Year 12 is down from year 11. The industry is 2.1 so year 12 has declined from the previous year and is near the lower quartile which means there is a weakness. There is a showing of declining trending.

In real live project with more cash flow after the pay back period would be more valuable than Project with no cash flow, yet its payback and discounted payback make it look worse. This is the reason, the shorter the payback period, other things held constant, the greater the project’s liquidity. Apart from this, since cash flows expected in the distant future are generally riskier than near-term cash flows, the payback is often used as an indicator of a project’s riskiness because the longer the payback period the higher is the risk associated with the project (Brigham, 2004) (Fabuzzi, 2003).

4. Receivables Turnover: By taking annual credit sales divided by/over accounts receivables with give you this ratio. In doing so, this ration shows how quickly a business collects its accounts receivables.

Accounts receivable turnover measures how many times a company can turn its accounts receivables into cash. This ratio shows how well the company is collecting credit sales from its customers. The equation for accounts receivable turnover

They must also consider payback period depending on what their upcoming capital needs will be and what the opportunity costs are for the products. For instance, there is opportunity cost for the corporate resources used creating Design Your Own Doll.

Current Ratio: A liquidity ratio that measures a company's ability to pay short-term obligations. Company G has a current ratio of 1.8 for year 12. When the current ratio of 1.8 for year 12 is compared to year 11’s ratio of 1.86, we see this ratio has declined slightly. When compared to the industry quartiles this ratio falls below the first quartile of 3.1, falls below the second quartile of 2.1, and above the third quartile of 1.4. This is an area of weakness for Company G and shows some reason to be concerned. They could be investing the excess money into other areas. Too much cash on hand is not a bad thing, but it is if you

This ratio demonstrates how efficiently the business is using inventory (or raw materials) in the production cycles. Having to much inventory can be expensive to the business in carry costs (cost to hold and manage that excess inventory), spoilage (not being able to use some inventory or having it become obsolete before being utilized) or interest if it has been financed, etc., etc.

A higher this ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Amazon performing better in this metrics.

As the creditors’ view, they prefer the high current ratio. The current ratio provides the best single indicator of the extent, which assets that are expected to be converted to cash fairly quickly cover the claims of short-term creditors. However, consider the current ratio from the perspective of a shareholder. A high current ratio could mean that the company has a lot of money tied up in nonproductive assets.

1) Payback period fails to consider the time value of money. It would be happen because is a serious drawback since it can lead to not correct decision. The variation of payback period method that attempt to remove this pitfall that called the method of discounted payback period.

Firms and Companies include ‘Ratios’ in their external report to which it can be referred as ‘highlights’. Only with the help of ratios the financial statements are meaningful. It is therefore, not surprising that ratio analysis feature are prominently in the literature on financial management. According to Mcleary (1992) ratio means “an expression of a relationship between any two figures or groups of figures in the financial statements of an undertaking”.

CURRENT RATIO show a company’s ability to pay its current obligations that is company’s liquidity. The current ratio position is lower for Honda at 0.33 than for Toyota at 1.22 in 2010. Honda has a large portion of receivables in assets both in trade, notes receivables and finance receivables. It has a huge portion of cash as well. This indicates the company has no problem in terms of generating a positive influx of assets. But in terms of liabilities it has a large portion of short term debt which makes almost 1/3rd of total Current liabilities. Also there is a significant portion of Long Term debt. The higher level of liabilities in the denominator reduces the overall ratio.