An Evaluation Of A Uk Public Limited Manufacturing Company

4460 Words18 Pages
Introduction This report is an evaluation provided to a finance director of a UK public limited manufacturing company, whose subsidiaries are around the world. The company’s stock is trading on the London Stock Exchange. The report is going to provide some information about working capital management (WCM). It is commonly known that working capital investment has become a large proportion in a firm’s balance sheet. According to Bank of Belgium, the proportion of accounts receivable, payment and inventory were respectively 17%, 13% and 10% of total assets of all Belgian nonfinancial firms in 1997 (Deloof, 2003). There is a similar situation in Spanish firms: there is 69% current assets of total assets and 52% current liabilities of the…show more content…
On the other hand, firms may lose the early payment discount offered by its suppliers, which may result in more finance costs (Wong, 2002). Trade receivable: Trade receivable may boost sales because it allows customers to access product’s quality before paying. The flip side of trade receivable is that capital would be locked in working capital, as a result the company’s financial department may face cash flow and liquidity problems (Jose, Lancaster and Stevens, 1996; Lazaridis and Tryfonidis, 2006). Inventory: A larger inventory reduces the risk of stock-out and it is also a vehicle to increase sales. The negative side of inventory is the same as trade receivable (Nazir and Afza, 2009; Deloof, 2003). Lazaridis and Tryfonidis (2006) states that an optimum level of inventory will have a direct effect on profitability since it will release cash invested in working capital and could also respond to a high demand. The measurement of WC Cash conversion cycle (CCC) is a widely used WC measurement, which is the time lag between the raw material purchase and the collection of finished goods. The CCC can be calculated as: The cash conversion cycle = Number of days accounts receivable + Number of days inventory – Number of days accounts payable payments. In real business operations, CCC as whole and each parts of CCC could be used to measure the efficiency of WCM (Deloof, 2003; García-Teruel and Martínez-Solano, 2007; Lazaridis and Tryfonidis, 2006; Gill,
Open Document