Working Capital

What is optimised production technology

Aims to balance flows rather than capacity. Aims at improvement of the production process.

What are the responsibilities of Credit Control Department?

1. Assessing customers credit risk (bank references, trade references, published info, credit reference agencies and companies own sales record) 2. Agreeing terms (set limits on time and amount of credit). 3. Collecting payment (strict with credit limit, sending invoices, systematically review debtors i.e. aged debtor analysis and chase slow payers)

Managing Payables

1. Delaying payment to suppliers to obtain a 'free' source of finance 2. Delaying too long may cause difficulties for the company Suppliers may refuse to supply in future, might only supply on cash basis, loss of reputation, supplier might increase price

How to manage inventories?

Appropriate location and storage robust inventory purchase procedures and reorder systems accurate and timely systems for the recording control and physical checks.

Working Capital Formula

Current Assets - Current Liabilities

Impact of higher levels of working capital on profitability

Higher levels of WC = improved liquidity

What are costs associated with receiveables?

Irrecoverable receivables i.e. when debts go bad Finance costs Admin costs e.g. staffing a credit control team Loss of sales revenue and contribution i.e. reduction in credit period may lose customers0

What is Just In Time?

JIT is a management philosophy that incorporates a "pull" system of producing or purchasing components and products in response to customer demand Products are pulled through the system from customer demand back down through the supply chain to the level of materials and components Consumer buys and the processes manufacture products to meet this demand

What is a push system?

Levels of buffer stock (inventories) are built up between each process. Production is executed according to schedule which could be based on best guess, last years sales and intuition.

Agressive WC

Low inventory, low receivables (incentives for people to pay you earlier), low cash levels, higher levels of payable (i.e. wait to pay suppliers) Pros: Cash is made available to use elsewhere in the business i.e. investment Using payables is a cheap source of finance (is that ethical or good for relationships?) Warehousing costs reduced Better profitability Cons: Risk of stock outs Could annoy customers if chasing them to pay Lack of liquidity Damage relationshisps by not paying

What is material requirement Planning

MRP - approach to manage inventory COnverts production schedule into a listing of the materials and components required to meet that schedule ensures adequate inventories are maintained and items available when needed. Push approach. Starts with forecasts of customer demand.

How to manage trade receivables and credit?

Managing recieavbles is effectively a balancing act between: 1. Collecting sales receipts as quickly as possible to reduce the cost of financing the receiveables balance 2. Extending the credit period to customers to encourage additional sales 3. Offering Early settlement discount - hope that benefits of recovering the receivables earlier would outweigh the costs of discount) 4. Using services of a debt factorign company (using a specialist debt collector who would anage your sales ledger)

What is working capital?

Measure of a companys liquidity, operational efficiency and its short term financial health. If it has substantial positive working capital then it has the potential to invest and grow.

What affects the level of working capital?

Nature of the industry e.g. manufacturing would have more stock/inventory Uncertainty in supplier deliveries - means extra stock would be needed to account for the fluctuations -Level of activity of the business - more output, more debtors, stock etc -Firms credit Policy - stricter the policy the lower the level of debtors -Length of operating cycle - the longer it takes to convert material into finished goods and then into cash, the greater the investment in working capital.

Working Capital Policy

Working Capital requirement is normally financed by banck overdraft because of flexibility in accomodating the fluctuating nature of net current assets However, short term borrowing is generally more costly than long term borrowing COnflct between profitability and liquidity

Impact of lower working capital on Profitability

lower levels of WC = improved profitiability because lower levels of inventory release cash for investment elsewhere in the business.