...Financial Ratios-Operating and Cash Conversion Cycle David S. O’Neal ITT Technical Institute July 8, 2014 Financial Ratios-Operating and Cash Conversion Cycle Table 1 Amazon.com Inc. (AMZN) Balance Sheet | | | Period Ending | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | | Assets | Current Assets | | Cash And Cash Equivalents | 8,658,000 | 8,084,000 | 5,269,000 | | Short Term Investments | 3,789,000 | 3,364,000 | 4,307,000 | | Net Receivables | 4,767,000 | 3,817,000 | 2,922,000 | | Inventory | 7,411,000 | 6,031,000 | 4,992,000 | | Other Current Assets | - | - | - | | Total Current Assets | 24,625,000 | 21,296,000 | 17,490,000 | Long Term Investments | - | - | - | Property Plant and Equipment | 10,949,000 | 7,060,000 | 4,417,000 | Goodwill | 2,655,000 | 2,552,000 | 1,955,000 | Intangible Assets | - | - | - | Accumulated Amortization | - | - | - | Other Assets | 1,930,000 | 1,647,000 | 1,388,000 | Deferred Long Term Asset Charges | - | - | 28,000 | | Total Assets | 40,159,000 | 32,555,000 | 25,278,000 | | Liabilities | Current Liabilities | | Accounts Payable | 21,821,000 | 18,210,000 | 14,896,000 | | Short/Current Long Term Debt | - | - | - | | Other Current Liabilities | 1,159,000 | 792,000 | - | | Total Current Liabilities | 22,980,000 | 19,002,000 | 14,896,000 | Long Term Debt...
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...Current Position Jones Electrical Distribution (hereinafter Jones Electric) is currently facing an issue with cash flows, which will ultimately affect the overall profitability and growth potential for the company. The owner, Nelson Jones, is diligent in paying his suppliers within ten days in order to capitalize on a two percent early pay discount, but in doing so, has over-extended cash flows. Though the company has been profitable and growing over the past three years, its current lender, Metropolitan Bank, will not increase a line of credit (LOC) beyond $250,000, a LOC upon which Jones has recently fully drawn. In order to ease the tensions of depleting cash reserves, Jones is seeking a higher LOC from another lender, Southern Bank & Trust (SB&T). A higher LOC will not only cover overhead expenses and take advantage of early pay discounts, but could also be invested in the continued growth of sales, as well as, potentially opening new locations. After weighing his options, Jones is convinced that he has to take on more debt in order to keep the business moving forward. Thus far, Jones is only contemplating one financing option, a higher LOC from SB&T. The terms of LOC are not favorable when weighed against Jones’s objective to grow the business. SB&T will limit the drawable amount, control investments in fixed assets, and control Jones’s withdrawal of funds from the business. As such, Jones needs to reconsider SB&T’s offer and consider other financing options...
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...Operating cycle, cash conversion cycle, and negotiated financing needed are determined and compared with industry practices. The student then analyzes the impact of changing the firm’s credit terms to evaluate its management of accounts receivable before making a recommendation. a. Operating cycle (OC) average age of inventory average collection period 110 days 75 days 185 days Cash conversion cycle (CCC) OCaverage payment period 185 days30 days 155 days Resources needed $11,253,425 b. Industry OC 83 days 75 days 158 days Industry CCC 158 days39 days 119 days Industry resources needed $8,639,726 c. Casa de Diseño Negotiated financing $11,253,425 Less: Industry resources needed 8,639,726 $2,613,699 Cost of inefficiency: $2,613,699 0.15 $392,055 d. 1. Offering 3/10 net 60: Reduction in collection period 75 days (1 0.4) 45 days OC 83 days 45 days 128 days CCC 128 days39 days 89 days Resources needed $6,461,644 Additional savings $8,639,726$6,461,644 $2,178,082 $2,178,082 0.15 $326,712 2. Reduction in sales: $40,000,000 0.45 0.03 $540,000 3. Average investment in accounts receivable assuming cash discount: New average collection period 45 days ($40,000,000 0.80) (365 45) $3,945,205 Average investment in accounts receivable assuming no cash discount: ...
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...experienced difficult times in March and April when their biggest consumer could not pay for its products. Because of this, the cash conversion cycle was examined as well as the working capital management presently used. Additional views were studied to determine the best course of action for the company. Although multiple factors play a role in determining the best working capital management policy, Team D will offer recommendations and how each philosophy would be beneficial for Lawrence Sports. Cash Conversion Cycle Emery, Finnerty, and Stowe (2007) summarized that “the cash conversion cycle is the length of time between when a firm pays its accounts payable and when it collects on its accounts receivable and is equal to the inventory conversion period plus the receivables collection period minus the payables deferral period” (p. 659). The initial start for the cash implementation plan would be to create and demonstrate a vendor program, such as a payable deferral period program and create longer cash conversion cycles for floating payment programs for payments going to the banks. Next pre-arrange the short term borrowing program by using short term marketable securities. The Lawrence Sports Company financial departments need to begin following strict money formulas before any transactions pertaining to the market are made. Then it would be smart to hold cash balances for pertinent needs. This will allow and open doors for investing in inventories for the future and existing...
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...An Analysis on Ratio of Beximco Pharmaceuticals Limited Letter of Transmittal 7th April, 2013 To, Mahabuba Rahman Lecturer of Finance IBAIS University House # 21/A, Road # 16 (Old-27) Dhanmondi, Dhaka 1209 Dear Madam, Here is the recommendation report on Ratio Analysis of “BEXIMCO PHARMACEUTICALS LTD.” As you read the report, you will get some idea about the pharmaceuticals industry of Bangladesh through our concerned organization. This report contains all the necessary information about the BEXIMCO PHARMACEUTICALS LTD. as like the mission and vision, the brief about all the activities and their services they performed and some other issues as your recommendation. We collected all this necessary information by internet, book and the annual report. We, therefore, pray and hope that you will encourage our work by accepting this report and if you have any further queries about the report you can contact us. Sincerely, Accepted By On behalf of Mahabuba Rahman Executive summary Report Proper 1. Introduction:- 2.1. Origin of the Report: The report was originated in our “Introduction to Finance” course. This report is being assigned as a part of learning objective of the course FIN-217 (Introduction to Finance). It is assigned by our honorable faculty “Mahabuba Rahman”, since a report is required for this course. Our teacher assigned us for this report to test our ability of preparing a business report and to learn. 1.2. Objective: ...
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...many challenges pertaining to minimizing working capital. (Brigham & Houston, 2013, pg 535) Working capital is a financial metric which represents operating liquidity available to a business, organization or other equity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered part of operating capital. Gross working capital equals to current assets. Net working capital (NWC) is calculated as current assets minus current liabilities. It is a deviation of working capital, which is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient...
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...Chapter 3 [Business Organization and Intellectual Property] Phil Young, founder of the Pedal Pushers Company, has developed several prototypes of a pedal replacement for children’s bicycles. The Pedal Pusher will replace existing bicycle pedals with an easy-release stirrup to help smaller children hold their feet on the pedals. The Pedal Pusher will glow in the dark and will provide a musical sound as the bicycle is pedaled. Phil plans to purchase materials for making the product from others, assemble the products at the venture’s facilities, and hire product sales representatives to sell the Pedal Pushers through local retail and discount stores that sell children’s bicycles. Phil will need to purchase plastic pedals and extensions, bolts, washers and nuts, reflective plastic pedals and extensions, bolts, washers and nuts, reflective material, and a microchip to provide the music when the bicycle is pedaled. A. How should Phil organize his new venture? In developing your answer, consider such factors as amount of equity capital needed, business liability, and taxation of the venture. Phil should organize his new venture as a corporation. The capital that is needed in order to sell the products he can raise from shareholders through common stock sales, or offerings. He can borrow capital from others and enter into contractual arrangements. He will have limited liability and won’t put his own personal assets in play. Taxation can be a bit difficult just because it...
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...MB0045 Financial Management | Unit 1 Financial Management | Self Assessment Questions Fill in the blanks: 1. What has changed the profile of Indian finance managers? 2. Finance management is considered a branch of knowledge with focus on the __________.3. Under perfect competition, allocation of resources shall be based on the goal of ________. 4. _______ is based on cash flows. 5. _________ consider time value of money. 6. What are the main goals of financial management? 7. ________ lead to investment in real assets. 8. _____ relate to the acquisition of funds at the least cost. 9. Formulation of inventory policy is an important element of _______. 10. Obtaining finance is an important function of _________. 11. What are the two critical issues to be considered under investment decisions? 12. Define rate of return. 13. The most important decision made by a finance manager is ________. Answers to Self Assessment Questions 1. Liberalisation and globalisation of Indian economy 2.procurement of funds 3. Profit maximisation. 4. Wealth maximisation 5. Wealth maximisation 6. Profit Maximisation and Wealth Maximisation 7. Investment decisions. 8. Financing decisions 9. Liquidity 10. Treasurers 11. The two critical issues are – evaluation of expected profitability of the new investment rate of return required on the project 12. Rate of return is normally defined as the hurdle rate or cut-off rate or opportunity cost of the capital 13. Dividend decision | Unit 2 Financial...
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...over-leverage and cash conversion problems. Looking at the firm’s current ratios and quick ratios (Table 3), both decreased from 2008 to 2012, which means Although current ratio in 2012 is higher than the industrial average due to inventory level, the quick ratio in 2012 is significantly lower than the industry because inventory as a current asset takes a great portion. This indicates that the firm’s ability to pay off short term debt is weak. Moreover, the cash conversion cycle is 265 days, which means that it takes the firm 265 days to convert the inventory to cash. The inventory level is really high compared to the industry because the inventory turnover ratio is approximately 1/3 of the industry. Holding too much inventory and unable to convert them into cash shortly also caused that the firm has a very low cash level on average. The firm is also over-leveraged given that the L/A ratio (Table 3) is twice the industry average and the Long term debt/equity ratio in 2012 is three times more. Given the fact that ROA is much lower than the industry, Rapid Repair probably overused its long-term debt to finance its assets. In the end of 2009, the firm doubled its size, however the sales didn’t growth proportionally to the size, which caused the low returns on assets. The interest coverage ratio is too low because the debt to be paid is high, which also negatively affects return on sales. According to the FCF analysis (Table 4), Rapid Repair should have enough cash to make the $50...
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...Alternative Working Capital Management Policy Collecting account receivables is an indispensable step to keep the cash levels at the desired point while guaranteeing the inflows from the opened receivables. Collecting these accounts on time will allow Lawrence avoiding the dependency on the bank loans to keep up with short-time expenses. Through the implementation of a payment discount system, Lawrence can speed up collections. Offering a 3/10 net 30 payment discount, which means that the company offers a 3 percent discount within 10 days, with the remainder due in 30 days, will provide an incentive for early payment and increase cash inflow. Risk Associated with policy Utilizing payment discounts will provide an incentive for early payment; however the risk for Lawrence is that Mayo and other partners will not take advantage of the payment discount. Mayo and Lawrence’s other partners may want to have a high deferral period which can enhance a company’s cash conversation cycle. If a company pays its bills at the last possible moment while collecting cash quickly, the cash conversion cycle may be low and allow a company to have more cash. Contingencies for Recommendation If Mayo and other companies want to delay payment to enhance their company’s cash conversion cycle then Lawrence could institute a lock box system as a contingency. Lock boxes are methods to speed up cash collection while shortening mail times, processing times, and availability times. Lawrence should accomplish...
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...and restrictions and grant this report. Sincerely Yours, Fahad Zaman Chowdhury Asif Mohammad Bakar EMBA Program Department Of Finance. University Of Dhaka. Table of Contents Serial No. | Chapter Name | Page No. | 1 | Introduction | 01 | 2 | Company profile | 02 | 3 | Statement of Problem | 03 | 4 | Methodology of Analysis | 04 | 5 | Theoretical Background | 05 | 6 | Working Capital of HEIDELBERG CEMENT BANGLADEHS LTD. | 07 | 7 | Cash Flow | 09 | 8 | Ratio Analysis | 11 | 9 | Cash Conversion Cycle | 13 | 10 | Recommendations of HCBL for better Working Capital Management | 15 | 11 | Conclusion | 16 | 12 | Bibliography | 17 | Executive Summary Working Capital refers to that part of a firm’s capital which is required for financing short term or current assets such as cash, marketable securities, prepaid expenses and inventories. Funds, thus invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange of other current assets. Hence, it is also known as...
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...Ann-Wu Head is the head of vendor relationship. She feels that Lawrence Sports’ bargaining power with Gartner is restricted since Lawrence Sports is not a major customer for Gartner. She finds Murray the more flexible of the two vendors and she is looking for more vendors like them. She feels that Murray is likely to run deep financial troubles if Lawrence Sports stretches payment beyond a limit. * As managers we are responsible for the working capital management for the company. We have the commitment of keep good relations while we solve the financial problem. The credit line is 1.2 million. Actually the credit line is in the top, if Lawrence does not start an aggressive financial solution, they are in a high risk of having no cash flow solvency. As a primary alternative the organization can...
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...WORKING CAPITAL PERFORMANCE ANALYSIS OF HINDUSTAN UNILEVER LIMITED COMPANY An Overview of FMCG Companies in India Fast Moving Consumer Goods (FMCG) goods are all consumable items (other than groceries/pulses) that one needs to buy at regular intervals. These are items which are used daily, and so have a quick rate of consumption, and a high return. FMCG can broadly be categorized into three segments which are: 1. Household items as soaps, detergents, household accessories, etc, 2. Personal care items as shampoos, toothpaste, shaving products, etc and finally 3. Food and Beverages as snacks, processed foods, tea, coffee, edible oils, soft drinks etc. Global leaders in the FMCG segment are Nestlé, ITC, Hindustan Unilever Limited, Reckitt Benckiser, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi, Gillette etc. A look at some factors that will drive growth in this sector: * Increasing rate of urbanization, expected to see major growth in coming years. * Rise in disposable incomes, resulting in premium brands having faster growth and deeper penetration. * Innovative and stronger channels of distribution to the rural segment, leading to deeper penetration into this segment. * Increase in rural non-agricultural income and benefits from government welfare programmes. * Investment in stock markets of FMCG companies, which are expected to grow constantly. Objectives The study aims at analyzing the working...
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...Mid Sweden University Department of Social Sciences Business Administration D Master Thesis Fachhochschule Aachen Fachbereich Wirtschaftswissenschaften Europäischer Studiengang Wirtschaft Diplomarbeit THE IMPACT OF WORKING CAPITAL MANAGEMENT ON CASH HOLDINGS – A Quantitative Study of Swedish Manufacturing SMEs Author: Place of Birth: 1st Examiner: 2nd Examiner: Tutor: Term: Due Date: Maxime Abel Frankenthal, Germany Prof. Håkan Boter (Mid Sweden University) Prof. Dr. Jürgen Stephan (Fachhochschule Aachen) Dr. Darush Yazdanfar Summer 2008 May 30th, 2008 Abstract This study examines the impact of working capital management on cash holdings of small and medium-sized manufacturing enterprises in Sweden. The aim of this work is to theoretically derive significant factors related to working capital management which have an influence on the cash level of SMEs and test these in a large sample of Swedish manufacturing SMEs. The theoretical framework for this study consists of a treatise of motives for holding cash, working capital management and cash level. From these theoretical findings, two hypotheses are deduced: • H1: Cash holdings are negatively related to the presence of cash substitutes • H2: Cash holdings are positively related to working capital management efficiency The quantitative investigation consists of the statistical analysis – namely comparison of means and correlation analysis – of key figures which are calculated from the financial statements...
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...Lawrence Sports Simulation: Managing Liquidity Lawrence Sports Simulation: Managing Liquidity This paper will discuss the three alternative working capital policies that manage working capital. Team D will identify the policy in which the team believes that Lawrence uses and will then make a recommendation on what policy Lawrence Sports should continue to use. This paper will then go on to include an evaluation of the risks that are associated with each of the policies as well as discuss the contingencies for the policy in which is recommended. This paper will also discuss the performance measures that could be used to evaluate the team’s recommendation. Finally, this paper will discuss an implementation plan for the team’s recommendation. Alternate Capital Policies Current Policy (Conservative Approach) The current policy in place at Lawrence is one that can be considered a conservative approach. The Conservative Approach uses long-term financing for the company’s long term assets, a few of the company’s temporary current assets, and all of the company’s permanent current assets (Emery et al., 2008). This has resulted in high costs of financing for Lawrence Sports with little risk; causing the company’s profitability to be low. Simply put; Lawrence has predominantly financed all of its current assets using long-term sources of financing where only a small portion of its assets sing short-term financing. This presents the risk of Lawrence developing a liquidity issue...
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