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
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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,
For any business stablishing the proper working capital management is critical. Having inappropriate working capital management can lead to bad operational business. Part of a management team in a company is to make business estimations in regards the company’s future expected sales as well as costs. This is done to better understand the requirements of the company’s future working capital. In additional, this provides management some guidelines on how to raise the appropriate funds at the appropriate time without having to interrupt any business operations.
For this week’s reflection, please write three complete and well composed paragraphs and, in your own words (do not quote from a book or website) explain what working capital is and why it is important for a business. As an example, describe a business that operates where you live and describe how knowing what the working capital of that company would be useful to the business leaders of that company and to outside investors.
Then, inventory allows minimizing costs, it is speculative stock. For instance by exploiting economies of scale that may exist during both production and distribution. Or, when the supplier provides significant discounts for bulk purchases, storage can be useful too. Delivery costs will be reduced if lot sizes are large.
Analyze the fundamental differences between the working capital structures and components for each chosen company, and speculate upon the main reasons why such differences exist.
Capital structure long term is looking at how assets for the business should be paid for. Through the article the common theme is to more efficiently change working capital into cash that can be used to pay for the debt and liabilities for the business. By converting the working capital into cash, the business can make payments without having to take out an extra loan or take on more debt for the business. The working capital management is evaluating the day-to-day finances of the firm and how to make sure it is paid for. Again converting working capital into tangible resources that can be used to pay for the firm is key to covering the businesses operating expenses day to day in this economy. It is more profitable for the company to do this. This will not change the overall total value of assets, but it would shift assets from being fixed into being current. Having more current assets creates a larger net working capital for the business, which is beneficial to them. Determinants of the businesses growth include total asset turnover and the dividend policy. The total asset turnover will be increased if the tips in this article are complied with. This is because having current assets that can and will be used increases this amount. The dividend policy is about choosing how much to pay shareholders versus reinvesting
George 's Train Shop is a family owned business that focuses on the sales and repairs of train toys. George is running a profitable business, but as he is aware of my MBA Managerial Finance class, he has asked for advice on his working capital practices. Although George is currently enjoying the benefits of a profitable business, there are opportunities for him to expand his business ventures. This first starts by dissecting degree of aggressiveness in working capital practices, current capital budgeting practices, and areas where he can improve in both arenas. In addition, careful management of the company 's cash flow will
On the other hand, the company has been growing constantly. In deed, according to the net income estimation for 2007 (see Table 7) the company increases its profits $25 thousand dollars more than the previous year. This is an evidence of how the company is been management and of its willing to grow year after year. Nevertheless, the first quarter of 2007 the working capital only has increased by $7 thousand dollars, which is the difference between the current assets and current liabilities but the importance of this is that according to the rotation on receivables and payable accounts, shown in Table 5 and 10, leads us to the conclusion that the company will have to pay its suppliers
Alan Litchman and Laura B. Trust, Co-Presidents of Finagle a Bagel, own a bagel business in Boston (Parrino, Kidwell, Bates, 2012). Alan and Laura met in business school and after gaining business experience in other industries they purchased the bagel business with the intent of growing it as much as possible. They have two primary target markets: 1) retail stores and 2) wholesale accounts with large institutions. In this paper, we will briefly discuss a few of the strategies they used to manage their working capital.
Working Capital is again in the red zone, dropping more than 75% from FY09 to FY10. However, the historic trend for the company is not very impressive, with working capital dropping as low as -$3 billion. The Operating Cash Flow Ratio is somewhat more reassuring, standing at 18.13 in FY10 from 14.67 a year earlier. This implies that for every dollar of current liability, the operations are providing $18 of revenue to cover the expense. However, operations are not primarily meant to cover just short term obligations, but also long term costs. Thus it cannot be justified that operations are very adequate to meet ST obligations.
My inventory control procedures provided both increased revenues and cost savings. Quite simply, I ordered adequate levels of products which were in high demand, I was able to better meet customers’ needs, and my revenues increased. The cost savings I experienced as a result of my inventory control procedures were a bit more complex. First, in establishing a routine schedule for ordering, I was able to reap the benefits of lower shipping costs. Because I had a routine schedule, I could
Working capital is defined as the current assets minus the current liabilities (Investopedia, 2012). As of the end of the 2003 fiscal year, Superior Living had $41,950 in working capital. This is a decrease of $150 from last year's working capital of $42,100. The working capital in FY 2001 was $39,500. The primary reason for the decline in the total amount of working capital appears to be that on the liabilities side, accounts payable increased 11.8%, and "other current liabilities" increased 19%. The increase in the current liabilities was greater than the increase in the current assets. Most current asset line items increased between 5-7% for the year.
ØPaying stock suppliers promptly - to make sure the business does not fall into debt with the supplier and lose their contract and to take advantage of any discount terms.
Additionally, implementations in working capital programmes are effective especially in GSK’s operations due to stable and shorter conversion days than of AZN. However, there are limitations included in interpreting its ratios: one might be that averages have not been used and another; that both companies have implemented its capital management at different periods of time; therefore, the costs of manufacturing, preparation in launches of new pipeline products and further implementations in manufacturing as well as restructuring its working capital has had its impacts in increasing cost of sales for certain periods; hence distorting its figures. This may result in uncertainty of how well a company operates over time as stability does not
The Project Report is a summary of Study of some of the elements of Working Capital Management at the Heavy Engineering Division of Larsen & Toubro Limited (L&T, HED). The various aspects of these working capital elements have been studied. The Study of working capital management involved understanding of receivables, payables and to an extent inventory management. After a brief introduction to the nature of Business activity of Larsen & Toubro and its Business Division - Heavy Engineering Division, the report comprises a detailed comparison of Heavy Engineering Division's performance with its Indian and Foreign Competitors. The comparison is based on profitability, productivity and working
In this paper I’ll analyze the fundamental differences between the working capital structures and components for Google and Oracle, and speculate upon the main reasons why such differences exist; how each company could improve its working capital positions. As a Wall Street Analyst who has to recommend one of the companies as an investment to a company’s clients; based solely on that company’s working capital; as an Investment Banker who has to recommend loaning a substantial amount of capital to one company based solely on that company’s working capital.