Chapter 13 â€“ The Management of Working Capital
13.2 Working capital is the pool of trading assets and liabilities upon/with which a business conducts its day-to-day operations. Technically, it is measured by the difference between current assets (cash; debtors; inventory) and current liabilities (bank overdraft; creditors).
13.3 (a) The period from payment for supplies/raw materials/inventory to the supplier to the cash collection from sales of finished goods.
(b) It will vary as a result of:
i) Business activity (eg manufacturer or retailer)
ii) Credit policies (eg from supplier and to the customer) ...view middle of the document...
Possible costs involved in extending the credit for customers
a) Finance cost (additional interest or lost interest on investment).
b) Administration cost (additional costs to administer and follow-up customers).
c) The greater likelihood of bad debts as the balance in credit customers accounts will increase with the provision of an additional credit purchase period.
13.10 The costs of holding too little cash are:
â€¢ Failure to meet obligations when they fall due which can damage the reputation of the business and may, in the extreme lead to the business being wound up.
â€¢ Having to borrow and thereby incur interest charges.
â€¢ An inability to take advantage of profitable opportunities.
The costs of holding too much cash are:
â€¢ Failure to use the funds available for more profitable purposes.
â€¢ Loss of value during a period of inflation.
13.11 Mechanism could include:
â€¢ Paying by eftpos
â€¢ Direct deposit
â€¢ B pay
â€¢ Net banking
â€¢ Credit card purchases
13.13 â€¢ An increase in production bottlenecks is likely to result in a decrease in raw materials and work-in-progress being processed within the plant. Therefore, stock levels (of finished goods) should fall.
â€¢ A rise in interest rates will make the cost of holding inventory more expensive (if they are financed by debt). This may, in turn, lead to a decision to reduce inventory levels.
â€¢ The decision to reduce the range of products should result in fewer inventory being held. It would no longer be necessary to hold certain items in order to meet customer demand.
â€¢ Switching to a local supplier may reduce the lead time between ordering an item and receiving it. This should, in turn, reduce the need to carry such high levels of the particular item.
â€¢ A deterioration in the quality of bought-in items may result in the purchase of higher quantities of inventory in order to take account of the defective element in inventory acquired and, perhaps, an increase in the inspection time for items received. This would lead to a rise in inventory levels.
13.14 Average inventory turnover may have deficiencies in relation to inventory management in terms of:
(a) The average is often a simple annual comparison which may not be reflective of what has happened during the period. This will be the case where the business is cyclical (high and low demand, supply periods â€“ fruit orchard; gift shop; holiday travel; clothing sales).
(b) The average across inventory lines will not reveal abnormalities in individual inventory lines.
(c) Possible changes in the accounting policy choice with regard to inventory valuation.
(d) The need to make comparisons with changes in the performance of other firms within the same industry.
13.17 JIT inventory management has the following potential disadvantages: