8. Working capital management Flashcards
(15 cards)
Factors that determine working capital requirements?
Nature of business
Size of business
Production policy
Seasonal fluctuations
Credit policies
Changing tech
Growth and expansion
Taxation policies
Optimum level of working capital
Trade off between profitability and liquidity
high levels of working cap = overcapitalisation
Conservative approach to working capital
Higher level of working capital
Higher liquidity
Cash tied up
Lower profitability
Lower risk
Aggressive approach to working capital
Lower level working capital
Lower liquidity
Cash savings
Higher profitability
Higher risk
Inventory Management techniques?
EOQ
ABC inventory control
JIT
Fixing inventory levels
VED
EOQ
Economic Order Quantity
Optimum order quantity
Assumptions
Demand and lead time constant
No buffer inventory needed
ABC inventory control
Analytical approach
Classify invebtory items
A = high investment rep small amount of inventory 15-20%
Closely monitored
B = 30-25%
Mintain good and regular records
C = Low value of consumption
Ordered half yearly
JIT
Reduce inventory to min level
Reduce flow times
Necessary items, n quantity, n times
Eliminate waste
Stop capital being tied up
Reduce storage and labour costs
Waste examples (cap and storage tied up, handling costs, rejects and reworks, queues and delays, long lead times)
Relationship with suppliers important
Disadvantages
Price fluctuation of material
Excess or unexpected demand
Reliant on suppliers
Invest in tech
Fixing inventory levels
Minimum level - lowest balance maintained
Re-order level - co should order new supply
Maximum level - max inventory to hold at any point
Danger level - Below minimum level, req immediate action
VED
Vital - without items no production
Essential - Needed but non availability not adversely effect production
Desirable - Shortage cause minor disruption
Trade Receivables + objectives
Used as promotional tool
Debts owed to company
Objectives
control associated costs
optimum level of TR
optimum level of sales
Factors that affect trade receivables
Size of credit sales
Terms of trade
Credit policies
Collection policies
Expansion plans
Factors to consider when developing a credit policy
Level of credit sales to optimise profit
Market conditions
Competition
Credit period
Terms of trade
Trade and settlement discounts
Efficiency of record keeping
Elements/ variants of credit policy
Terms of credit
Agreement
How long? > increase WCC < lose customers
Assessing creditworthiness
Of new cus
Review and monitor regularly
Collection policies
Follow up procedures
(email, letter, freeze account, debt collectors, legal action)
Trade Payables + objectives
Objectives = optimum level of trade credit support mutual relationship with suppliers
Balance liquidity and profitability
Maintain good r with suppliers
Simple and easy form of ST finance
Early settlement discounts taken where possible
Liquidity to pay trade payables when due
