Reference no: EM131682238

Question 1

1) UPS Forecasts:

Seasonal variations for UPS requires planning around changes like gas prices and shipping costs. The company could not predict with 100% accuracy how these two items would change each year, they just know that they were subject to change. Sometimes the change is radical. Knowing that gas prices and shipping costs would fluctuate enabled the company to plan ahead so that they are better prepared to face the change.

This concept of preparing for the unknown is very similar to me. Without too much detail, I will share that it is the job of all service members to prepare for war, contingencies, and natural disasters. We cannot know what exactly is coming, but through the planning process we can identify needs and create guides. In the case of the services, our plans save lives and restore order. For companies, it saves money and also restores order.

How forecasting functions for a company varies by method but it is supposed to predict "the sales forecast for the coming year [which] reflects (1) any past trend in sales that is expected to carry through into the new year and (2) the influence of any anticipated events that might materially affect that trend" (Keown, 2017). One method that is utilized involved gaining estimates of the company's financial needs based on a predicted "asset requirement and financing source"(Keown, 2017). This process is referred to as the Percent of Sales method.

2. DELL net working capital:

"Net working capital is the difference between the firm's current assets and its current liabilities" (Keown, 2017). DELL realized that they lost money in several key areas; over stock, assembly costs, and outdated inventory. Outdated, overstocked computers are a liability. The technological changes for computers were and still are very fast which made keeping models in stock wasteful. At worst they would not sell and at best they would be sold for less just to get rid of the resource. Removing these items from their plans was a culture change and a creative solution for managing their working capital.

Question 2

Seasonal variations in the delivery business can make forecasting finance requirements more complex. The sales forecast method, which is best uses a constant percent of sales, which can be inaccurate for businesses that have fluctuations in sale related to things like seasonality, like UPS. This does not mean the information provided by the sales forecast method are useless to companies like UPS, but it is important for those reading the data to understand the limitations of this forecasting method. Another tool, which may be far more beneficial to a company like UPS is cash budgeting. It forecasts the cash inflows and outflows for a specific period. Budgets can be created for a week, month, quarter, or year. This provides detailed insight to users as to the projected cash needs of an organization, and can be of benefit those types of organizations that see things like seasonal changes across the business. As with anything else the accuracy of a cash budget relies heavily on the accuracy of the input by users, but this level of detail may help more than the sales forecast method in forecasting financing requirements for a company United Parcel Service.

When Dell Computer Corporation was confronted with falling sales it looked to improving its management of working capital to free up financial resources. One of the most critical changes Dell made was to reduce inventory volumes. Dell accomplished this by building computers based on customer orders, not on forecasted sales. By not holding such high volumes of inventory Dell was also able to reduce its volume of obsolete inventory. Dell benefited from selling direct to the customer. This allowed the computer company to carry less finished inventory. When it came to ordering parts Dell would only order the components that met immediate needs. This just in time inventory method reduced their parts inventory to a minimum as well. Maximizing their inventory freed up the cash Dell needed to accelerate their growth and increase corporate profits. Had Dell continued along the same path of other computer companies and used forecasted sales to determine inventory levels it is likely that Dell would not have become the computer giant they are today.