Module 19 - Working Capital Management

Question 1

What are the four components of working capital?

Answer 1

Stock

Debtors

Cash

Creditors

Current assets - current liabilities

Question 2

Is liquidity solely useful in the short term?

Answer 2

No it is also essential for long term success

Question 3

What is a stock out cost and what are the two elements?

Answer 3

Stock out is when you run out of stock and the cost types are:

• paying a premium to quickly get new stock
• the cost of potentially missing an order

Question 4

Ratio analysis:

What are the two types and what are their equations?

Answer 4

1. Stock turnover (times)

COS/ Sales = number of times stock turns over in a day

2. Stock Turnover Days

(Stock x 365) / COS

Question 5

By achieving high stock turnover what costs do you negate?

Answer 5

1. Obsolescence risks
2. Materials management
3. Finance costs
4. Storage

Question 6

I’m manufacturing industries what are the typical stock turnover times and stock turnover days?

Answer 6

1. Stock turnover times = 3.5-4 times

2. Stock turnover days = 3 to 4 months

Question 7

The scientific (statistical analysis) control of stock can be analysed in to three parts:

Answer 7

1. Economic Order Quantity
2. Buffer (safety) stock
3. Discounts for bulk purchases

Question 8

What is the second way of calculating Stock days?

Answer 8

Stock days = (Average stock held x 365) / Annual Usage

Question 9

What is the lead time and how is it calculated?

Answer 9

The time between placing an order and receiving one.

Lead time demand = lead time(days) x units used per day.

Question 10

What is the difference between reorder level and reorder quantity?

Answer 10

Reorder level is the level that triggers a reorder (lead time x daily usage)

Reorder quantity is the amount reordered = EoQ

Question 11

What two variabilities does Safety Stock negate?

How do you calculate safety stock?

Answer 11

Volume usage variability

Lead time variability

SS= reorder level - (average usage x average lead time)

Question 12

How do you calculate average stock level when there is a safety stock?

Answer 12

(Safety stock + order quantity)/ 2

Question 13

What is the reorder level and what is the only way to avoid a stock out?

Answer 13

To avoid a stock out you must order:

Reorder level = Maximum usage x maximum lead time.

Question 14

How do you calculate maximum stock level?

Answer 14

MSL = reorder level - (minimum stock usage x minimum lead time) + reorder level

Question 15

What are limitations of EoQ?

Answer 15

• assumes materials are used at a constant rate
• limited use when materials can’t be predicted
• limited use when material prices fluctuate
• it depends upon historical data

Question 16

What is the working capital cycle?

Answer 16

The amount of time between cash being expended on the production of a product and the collection of cash from a customer.

= stock days + debtor days - creditor days