Module 19: Working Capital Management

Question 1

What are the 4 components of working capital?

Answer 1

Stock
Debtors
Cash
Creditors

Question 2

What is the working capital of a business?

Answer 2

Current assets - current liabilities

Question 3

What are the two elements to stock out costs?

Answer 3

Costs of obtaining a rush order from supplier- premium prices and special delivery
Loss of a sale or future sales- damage to goodwill

Question 4

How to calculate stock turnover (times)?

Answer 4

Cost of sales/closing stock

Question 5

How to calculate stock turnover days?

Answer 5

Closing stock/cost of sales x 365

OR

average stock/annual usage x 365

Question 6

What is the economic order quantity model? EOQ

Answer 6

Decide optimum order size for stocks

Minimise costs of ordering and stockholding

Question 7

What are the 3 parts the scientific control of stocks may be analysed into?

Answer 7

EOQ
Buffer (safety stocks)
Discounts for bulk purchases

Question 8

What is the EOQ formula?

Answer 8

Q = square route of 2CoD/Ch
D= 1 year usage
Co = cost of 1 order
Ch = holding cost per unit for 1 period
Q = re-order quantity

Question 9

How to calculate order cots?

Answer 9

No. of orders x cost per order

Question 10

How to calculate stock holding costs?

Answer 10

Average stock level (divide by 2)(units) x holding cost per unit

Question 11

Total stock related costs in a year?

Answer 11

Order cost + stock holding costs + purchase costs (ignore if not in q)

Question 12

How to calculate lead time demand (re-order level)?

Answer 12

Lead time (days) x units used per day

Question 13

What is the re-order level?

Answer 13

Stock level that prompts the company to order more stock

WHEN company should order

Question 14

How to calculate safety stock?

Answer 14

Average stock level = safety stock + (EOQ/2)

OR

(Max stock + safety stock)/2

Question 15

Average stock holding cost?

Answer 15

Average stock x holding cost per unit

Question 16

Stock-outs can only be avoided if the company re-orders at?

Answer 16

Maximum lead time demand (re-order level)

Question 17

Maximum re-order level?

Answer 17

Maximum usage x maximum lead

Question 18

Average stock used during lead time?

Answer 18

Average usage x average lead time

Question 19

Safety stock?

Answer 19

Reorder level - (average usage x average lead time)

Question 20

Average stock level?

Answer 20

Safety stock level + order quantity/2

Question 21

Max stock level?

Answer 21

Re-order level - (min usage x max lead time) + re-order quantity

Question 22

To decide whether it is worthwhile taking a discount and ordering large quantities?

Answer 22

Total purchasing + ordering + stockholding costs

Question 23

Total cost will be minimised at?

Answer 23

Pre-discount EOQ level, so that a discount not worthwhile

Min order size necessary to earn discount

Question 24

Limitations of the EOQ?

Answer 24

Assumes materials used at a constant rate
Limited use in dealing with materials whose use cannot be predicted
Limited use in dealing with materials whose prices fluctuate radically
Depends upon historical data

Question 25

Increasing stock holding costs result in?

Answer 25

Lower economic order quantity

Smaller more frequent deliveries most cost effective

Question 26

General trend in stock management?

Answer 26

Keep stock levels as low as possible

Holding costs much higher than originally thought

Question 27

Working capital cycle calc?

Answer 27

Stock days + debtor days = creditor days

Question 28

What is the working capital cycle?

Answer 28

Period of time which elapses between point at which cash begins to be expended and collection from customer