Example on controlling working capital, Financial Management

Assignment Help:

Q. Example on Controlling working capital?

Describe how a manufacturing company could control its working capital levels and impact of the suggested control measures.

Solution:

Controlling working capital

Some of the practical aspects that could be taken to achieve this include:

1 Reducing average raw material inventory holding period

  • Ordering in small quantities to meet immediate production requirements though could lose quantity discounts.
  • Reducing the level of buffer stocks if these are held however this will increase the risk of production being halted because of a stock out.
  • Reducing the lead time allowed to suppliers, but could also increase risk of a stock out.

2 Increase the period of credit taken from suppliers

  • If credit period is extended then company may lose discounts from prompt payment. Financial effect of this must be calculated and compared with the cost of funds from other sources.
  • If credit period is extended then goodwill may be lost, which is significant in the event of goods being required urgently.

Reducing  the  time  taken  to  produce  goods  and  inventory  holding  period  or finished inventories

  • Efficiency results in cost savings hence finding an efficient way to produce goods (i.e. in economic batch quantities) though the company should ensure than quality is not sacrificed.
  • Savings arising from inventory holding reduction should be evaluated against the cost of inventory out, together with the effect on customer service.

4 Reducing average debt collection period

  • Administrative costs of speeding up debt collection and effect on sales of reducing credit period allowed should be evaluated.

Related Discussions:- Example on controlling working capital

Define mergers affect consumers, How do mergers affect consumers? A: Th...

How do mergers affect consumers? A: The impacts mergers have on consumers vary widely. There may be a few inconvenience and anxiety when a customer's bank or branch is obtained

LEVERAGE, Evaluate the importance of leverage in financial management of a ...

Evaluate the importance of leverage in financial management of a small scale company

Fm, challenges that the finance manager face in fulfilling the managerial f...

challenges that the finance manager face in fulfilling the managerial function

Risks associated with investing in bonds, Interest rate risk is the risk wh...

Interest rate risk is the risk wherein the investor in bonds faces the risk of a fall in his bond price as and when there is a rise in the market interest r

Price volatility characteristics of option-free bonds, As we know tha...

As we know that price of option-free bond changes in the opposite direction from a change in bond's required yield, Table 1 and figure 1 explains this feature of

FINANCIAL RISK MGT, DQ #1: Discuss the challenges of VaR approaches in valu...

DQ #1: Discuss the challenges of VaR approaches in valuing risk. How does portfolio risk assessment differ from a single asset’s risk assessment? How do managers typically load ba

Describe concepts of finance function, Q. Describe Concepts of finance func...

Q. Describe Concepts of finance function ? 1) The finance function in the business task in the providing funds needed by the enterprises on the term that one most favorable in

Define discounting the equity cash flow, Which of these two methods is bett...

Which of these two methods is better: discounting the Equity Cash Flow or discounting the Free Cash Flow? The results we get by discounting the Equity Cash Flow and the Free Ca

Determination of values price and volume, Determination of values The v...

Determination of values The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indica

Corporate bonds, Corporate bonds are debt securities issued by privat...

Corporate bonds are debt securities issued by private and public corporations. These bonds are issued to meet specific requirements like building a new plant, pur

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd