Module 19: Working Capital Management Flashcards
What are the 4 components of working capital?
Stock
Debtors
Cash
Creditors
What is the working capital of a business?
Current assets - current liabilities
What are the two elements to stock out costs?
Costs of obtaining a rush order from supplier- premium prices and special delivery
Loss of a sale or future sales- damage to goodwill
How to calculate stock turnover (times)?
Cost of sales/closing stock
How to calculate stock turnover days?
Closing stock/cost of sales x 365
OR
average stock/annual usage x 365
What is the economic order quantity model? EOQ
Decide optimum order size for stocks
Minimise costs of ordering and stockholding
What are the 3 parts the scientific control of stocks may be analysed into?
EOQ
Buffer (safety stocks)
Discounts for bulk purchases
What is the EOQ formula?
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
How to calculate order cots?
No. of orders x cost per order
How to calculate stock holding costs?
Average stock level (divide by 2)(units) x holding cost per unit
Total stock related costs in a year?
Order cost + stock holding costs + purchase costs (ignore if not in q)
How to calculate lead time demand (re-order level)?
Lead time (days) x units used per day
What is the re-order level?
Stock level that prompts the company to order more stock
WHEN company should order
How to calculate safety stock?
Average stock level = safety stock + (EOQ/2)
OR
(Max stock + safety stock)/2
Average stock holding cost?
Average stock x holding cost per unit
Stock-outs can only be avoided if the company re-orders at?
Maximum lead time demand (re-order level)
Maximum re-order level?
Maximum usage x maximum lead
Average stock used during lead time?
Average usage x average lead time
Safety stock?
Reorder level - (average usage x average lead time)
Average stock level?
Safety stock level + order quantity/2
Max stock level?
Re-order level - (min usage x max lead time) + re-order quantity
To decide whether it is worthwhile taking a discount and ordering large quantities?
Total purchasing + ordering + stockholding costs
Total cost will be minimised at?
Pre-discount EOQ level, so that a discount not worthwhile
Min order size necessary to earn discount
Limitations of the EOQ?
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
Increasing stock holding costs result in?
Lower economic order quantity
Smaller more frequent deliveries most cost effective
General trend in stock management?
Keep stock levels as low as possible
Holding costs much higher than originally thought
Working capital cycle calc?
Stock days + debtor days = creditor days
What is the working capital cycle?
Period of time which elapses between point at which cash begins to be expended and collection from customer
