F2- working capital management Flashcards
1
Q
- inventory management -balancing act
A
- this is between liquidity ( to reduce the unneeded inventory items in order to reduce the funds needed to fund those inventories) and profitability (ensuring the inventories are enough to increase sales)
- an aggressive approach to inventory management would mean that we reduce the level of inventory we hold, thus reducing part of our investment in working capital and improving cash flow.
2
Q
2.1 an aggressive approach to inventory management-Bought-in components and other raw materials
A
an aggressive approach to inventory management would mean that we reduce the level of inventory we hold, thus reducing part of our investment in working capital and improving cash flow.
- bough-in components and other raw materials
- reducing inventory levels as much as possible which means that we would not hold surplus or take advantage of bulk discounts just because they are available. - be achieved by adopting a just-in-time approach for purchasing where we time orders so that the components and raw materials can be delivered and then used straight away in production.
- this would need good relationship with our suppliers who would be able to satisfy our orders quickly,
- we would also need good information about future production and therefore purchasing requirements, which may require investment in new systems.
- a potential reduction in profit as a result of losing the bulk discounts (although this would be mitigated slightly by the reduction in holding costs)
- a greater risk of not having raw material and components when we need them because say a supplier is late with a delivery.
3
Q
2.2 an aggressive approach to inventory management–finished goods
A
move towards a system of producing on the basis of sales orders rather than for inventory
- require a change in the relationship with our customers and a change in their expectations of how quickly we can supply them.
- require investment in more sophisticated sales ordering and production scheduling systems.
- an increased risk of damaging customer relationships, especially in relation to online customers who will expect to place an order and receive the goods in a short space of time. these customers are our most profitable and it would be counter-productive if they started buying through a retailer rather tahn directly with us because of a long delivery time.
4
Q
- related costs of inventory management
A
- purchase costs
- holding costs:
- costs of storage and stores operations
- interest charge
- insurance costs
- cost of obsolescence or deterioration - ordering costs
- costs of placing the orders
- cost of goods inwards checking
- cost of ensuring that we check and pay the invoices correctly
- delivery charges
5
Q
- inventory management
A
- holding high level of inventories
- interest costs for the money tied up in buying inventories;
- cost to store the inventory, which has the effect of reducing our profit;
- products become obsolete and unsaleable, which would reduce profit as this inventory would need to be written off;
- other risks such as inventory being stolen etc - holding low level of inventories
- greater risk of stock-outs and lost sales;
- higher re-order costs;
- lost quantity discounts
6
Q
- EOQ model
A
economic order quantity model aims to compute the optimal order size by minimising the total of holding costs and ordering costs. assumptions: 1. demand for the inventory is constant; 2. the lead time in constant; 3. purchase price is constant; 4. no buffer inventory is held.
7
Q
6.1 suitability of EOQ model
A
- it determines an order quantity that minimises the total of holding and ordering costs.
- it is possible to buikd in a level of buffer inventory and we can use the model to assess whether bulk purchase discounts are worthwhile or not, by considering purchase costs alongside the costs of holding and ordering.
8
Q
6.2 the suitability of EOQ model
A
- EOQ assumes that demand for the bought-in component question is constant throughout the year and can be redicted accurately
- over the past few months, we have expanded into new markets and sales have been higher than we expected, meanding that our predictions have not been that accurate. - EOQ model assumes that holding costs are variable with the amount of inventory held.
- the reality is that this is not the case for most of our holding costs, the costs of operating the warehouse are likely to be mostly fixed in nature. - EOQ model assumes that lead time ( the time taken from placing the order to receiving the components) is known with certainty.
- however, as we have recently experienced, this is not necessarily the case because some suppliers have not delivered when expected,.
9
Q
- balacing act of receivables management
A
this is between liquidity (having cash flows: collect cash sooner) and profitability(granting credit to customers in order to increase sales and hence profitability)
10
Q
- credit policies
A
- assess the credit status of customer including bank references, trade references, visiting the customer`s premises and websites etc.
- terms of credit granted to customers including credit period and credit limits.
- day to day policy including invoicing promptly and collecting overdue debts;
- monitoring the credit system using age analysis ratios and statistical data for the irrecoverable debts
11
Q
- assessing the creditworthiness of customers
A
to collect information about the potential customer.
- financial statements of the customer will give us an indication of their financial stability, cash position, outstanding commitments and how long they take to pay their current suppliers.
- an internet search on the business will enable us to see if there are any indications of payment problems in the past.
- to take references from independent third parties including the potential customer`s bank (bank reference ) and suppliers (trade reference)
- to obtain a credit agency reference for the customer.
12
Q
- credit control
A
- set reasonable credit terms
- the amount we are prepared to sell to them on credit;
- the length of time given to pay. - have robust credit control procedure in place which ensure that invoices are accurately processed in a timely manner and that aged receivables reports are prepared and monitored so that outstanding debts are chased up in a timely manner.
13
Q
- consumer credit (trade receivables)
A
trade receivables as a source of short-term finance by factoring the debts for using invoices discounting
- be interest costs and fees involoved
- invoice discounting - a confidential service
- factoring the customers-aware that the debt is being factored and may raise a question mark over our financial stability.
14
Q
- consumer credit (trade receivables)
A
trade receivables as a source of short-term finance by factoring the debts for using invoices discounting
- be interest costs and fees involoved
- invoice discounting - a confidential service
- factoring the customers-aware that the debt is being factored and may raise a question mark over our financial stability.
15
Q
- consumer credit (trade receivables)
A
trade receivables as a source of short-term finance by factoring the debts for using invoices discounting
- be interest costs and fees involoved
- invoice discounting - a confidential service
- factoring the customers-aware that the debt is being factored and may raise a question mark over our financial stability.
