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

Explain the concepts of planning the work, Explain the concepts of Planning...

Explain the concepts of Planning the work Determine scope and objective of the audit (to verify assets, to check adequacy of internal controls etc...). Ensuring appropr

Show the working capital in a business, Q. Show the Working capital in a bu...

Q. Show the Working capital in a business? Working capital in a business is essential since of operating cycle. However the need for working capital doesn't come to an end afte

Define in market mergers, What are "in-market" mergers? A: An in-market m...

What are "in-market" mergers? A: An in-market merger is one that occurs between two banks operating in similar geographic area, usually a city or metropolitan area. The merged in

Conversion parity price, We defined the conversion premium as the dif...

We defined the conversion premium as the difference between the market price of the convertible and the conversion value. The conversion premium ratio tells us ab

Contemporary issues, What are the social and contemporary issues in financi...

What are the social and contemporary issues in financial management?

Minimax decision, How to compare minimax and maximin with figures and comme...

How to compare minimax and maximin with figures and commentary ?

Major advantages of preparing a statement of cash flow, QUESTION 1 ...

QUESTION 1 Part A i) Define the terms finance lease and operating lease and explain how you would distinguish between the two leases ii) When accounting for fina

Explain taxonomy of financial intermediaries, Taxonomy of financial interme...

Taxonomy of financial intermediaries We start by looking at the USA, the largest economy and financial system in the world. Subsequently we will turn to other countries. In the

Need for credit and its nature, Need for Credit and its nature On the d...

Need for Credit and its nature On the demand side of the economy are the consumers of goods and services who require funds basically for acquiring certain consumer durables. Th

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