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

No title, discuss the steps in the controlling process

discuss the steps in the controlling process

Determine the weighted average cost of capital, To evaluate a company using...

To evaluate a company using enterprise discounted cash flow (DCF), we discount free cash flow by the weighted average cost of capital (WACC). The weighted average cost of capital r

Abnormal earnings valuation model, A technique for knowing a company's wort...

A technique for knowing a company's worth that is based on earnings and book value. It is also known as the residual income model, it seems at whether management's decisions cause

Financial audit, To begin this topic, the case of China Sky describes the a...

To begin this topic, the case of China Sky describes the appointment of a special auditor  in the organization that is also a rule in the procedures of Singapore Exchange (SGX). Th

Sole proprietorship, Sole Proprietorship This business form is the lega...

Sole Proprietorship This business form is the legal default form for any person who makes no effort to organize the business otherwise but does business in the United States. T

Analysis of capitalization, You must analyze how the company is financed th...

You must analyze how the company is financed through equity and debt financing. You will discuss the level of leverage and how it compares to similar companies in the Industry.

Define market value in modigliani miller equation, Define in the Modigliani...

Define in the Modigliani-Miller equation (MM equation), why is the market value of the levered firm greater as compared to the market value of an equivalent unlevered firm? Th

Australian securities and investment commission, Australian Securities and ...

Australian Securities and Investment Commission: The Australian Securities and Investment Commission (ASIC) is an independent government body established by the ASIC Act 1989.

What do you mean by cash flow ratios, Q. What do you mean by Cash Flow Rati...

Q. What do you mean by Cash Flow Ratios? Cash Flow Ratios: - Cash Flow Ratios are an additional device of cash management. Some important cash flow ratios are: (i) Cash Turn

Function of the investment decision, Q. Function of the Investment decision...

Q. Function of the Investment decision? Investment decision related of the selection of the fixed assets. the assets can be acquired fall into two board groups i) long terms

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