Working Capital Simulation

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WORKING CAPITAL SIMULATION LT10 – B PHASE 1: SELECTION CRITERIA: In selecting what option to select the team came up with the following criteria: 1.) Selected option should lead to a reduction in working capital requirement and reduce short term debt in the process. 2.) Selected option should reduce the Cash Conversion Cycle. 3.) Selected option should free up locked capital in receivables and inventories. 4.) Selected option should lead to a zero working capital policy in the long run. SELECTED OPTIONS: We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit…show more content…
Combined they show a significant increase in EBIT with a lower increase in WCR. Although we foresee a significant increase in WCR we feel that the credit line we have and the amount of capital we freed from phase would be sufficient to reduce the impact of the additional WCR. FINANCIAL RESULTS AND LEARNINGS: Our choices led to a constant increase in net income over the three years. Short term debt increase by approximately 100% percent but steadily reduced over the next three years. We were happy with the positive growth of the company and the fact that we were able to pay off most of the initial short term funding required by the increase in working capital requirement. Overall the current situation of the company in 2018 is good, although the total value created is less than 20% of that created in phase 1. From this we learned that the value of the firm can be significantly increased more through a reduction in working capital requirement than through increasing the firm’s sales and net income. PHASE 3: SELECTION CRITERIA: For this phase we decided to continue with the selection criteria from phase 1, and continue to try to increase sales with the minimum working capital requirement. We also decided to minimize risk and not go with options that have, however small, a chance of creating net losses for the company. SELECTION OPTIONS: Based on our analysis we felt that renegotiation of supplier credit

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