...I. Introduction – Bill II. Alternative Working Capital Policies – Alicia Alternative Working Capital Policy In the months illustrated Lawrence Sports struggled with working capital management. Lawrence Sports must work closely with its clients and lenders to manage cash flow not only to manage working capital but to grow into a viable company. Lifland (2011) says, “The efficient management of these assets includes maintaining adequate product levels, monitoring of appropriate credit/payment terms, and mitigating any situation where the servicing of the working capital may significantly constrain the firm’s cash position. Lawrence Sports must implement alternative working capital policies to effectively monitor working capital in the short term to include lending, monitor working capital monthly, negotiating short-term and implementing supplier agreements to negotiate client payment strategies. Most importantly, Lawrence Sports must more closely monitor working capital to evaluate cash flow and profitability. Lawrence Sports must maintain adequate cash to decrease loan requirements. Monthly monitoring of working capital can assist managers in making effective financial decisions. In monitoring working capital, management may also evaluate appropriate policies to increase profitability and reducing costs. Lawrence Sports currently holds an automatic credit line with the bank that will provide credit within $50,000 balance each month. Monthly short-term loans involve additional...
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... Analysis of the relationship between working capital policy and operating risk: an empirical study on Jordanian industrial companies Abstract The study analyzes the working capital management practices and their impact on profitability and risk of industrial Jordanian firms for the period of 2004 to 2007. The total sample of the study consists of 59 industrial firms listed on Amman Stock Exchange. The working capital management practices examine the impact of aggressive/conservative working capital investment and financing policy and analyze through cross-sectional regression models the relationship between working capital policies and profitability as well as risk of the firms. Efficient management of working capital is a fundamental part of the overall corporate strategy aiming to create the shareholders’ value. Firms try to keep an optimal level of working capital that maximizes their value. The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. It requires continuous monitoring to maintain proper level in various components of working capital, i.e. cash receivables, inventory and payables, etc. The result indicates a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policy. The firms yield negative returns if they follow an aggressive working capital policy. Moreover, the present study validates...
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...WORKING CAPITAL POLICY OF WHSmith PLC OLUKAYODE OMOSEBI MBA -8A A4032655 ACF: ACCOUNTING AND CORPORATE FINANCE TABLE OF CONTENT INTRODUCTION………………………………………………………………………………………..3 WORKING CAPITAL POLICY…………………………………………………………………………5 WHSmith: WORKING CAPITAL POLICIES………………………………………………………6 CASH CONVERSION CYCLE………………………………………………………………………..10 KEY ISSUES……………………………………………………………………………………………..11 RECOMMENDATIONS ………………………………………………………………………………12 CONCLUSION………………………………………………………………………………………….15 REFERENCES…………………………………………………………………………………………..16 APPENDICES…………………………………………………………………………………………..17 INTRODUCTION WHSmith PLC is one of UK’s leading retailers and is made up of two core businesses – Travel and High Street. Travel stores sell a tailored range of products to cater for people on the move or in need of a convenience offer. High Street sells a wide range of products which are divided into four categories: Stationery (including greetings cards), Books, and News and Impulse (including newspapers, magazines, confectionary and other impulse products), as well as a convenience offer of Entertainment products. High street’s trading is seasonal, peaking at Christmas, with other peaks at Easter and in August and September for the ‘Back to School’ range. WHSmith aims to build on its position as the UK’s most popular bookseller, stationer and newsagent by continuing to grow its strongly performing Travel business and delivering its High Street plan. It aims to improve the company’s...
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...Impact of Working Capital Management on Profitability 1 IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY Impact of Working Capital Management on Profitability of Textile Sector of Pakistan Sumaira Tufail Hailey College of Commerce University of the Punjab, Lahore Sumaira_08sep@yahoo.com This paper has been presented in the organized by School of Business and Economics University of Management and Technology, Lahore, Pakistan This paper has been included in the conference proceedings with good intentions, where the conference and its organizers are not liable at all for the contents of this paper and / or any part of it. For more information about the conference please visit the conference website: http://cgr.umt.edu.pk/icobm2013/index.html or write the organizers at icobm@umt.edu.pk Proceedings of 3rd International Conference on Business Management (ISBN: 978-969-9368-07-3) Impact of Working Capital Management on Profitability 2 ABSTRACT Working capital can be considered as source of existence for a financial body and management of working capital is regarded as one of the most essential part of business management. This study aims to find out the impact of working capital policies on profitability. Return on assets is used as a measure of profitability. Current assets to total assets ratio is used to compute the investment policy of working capital management and to determine financing policy of working capital management current liabilities to total assets ratio...
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...indicate whether a company can continue without going concern problem. Working capital is subtractive between current assets and current liabilities, and it is helpful to increase firm’s profitability in the short term but taking a risk of insolvency. Manager of a firm are desired to find a balance between liquidity and profitability to improve cash flow and maximize shareholder’s wealth. As soon as a company starts to run its business, it comes the decision and strategy about how much cash or inventory should be hold, how to financing and investing funds, how much debt to take and how long for the payment periods. Those decisions have serious influences on business cash flow and profitability. The Meaning of Working Capital The way to calculate working capital is: Working capital = Current Assets – Current Liabilities “Current assets may include inventories of raw materials, work-in-progress and finished goods, trade receivables, short-term investments and cash, while current liabilities may include trade payables, overdrafts and short-term loans.” (See table 1) “Working capital is the result of subtracting current liabilities from current assets. It is a measure of a company's solvency, its capacity to make large purchases and take advantage of bulk discounts, and its ability to attract customers by offering advantageous credit terms” (Conrad Carlberg, April 2, 2008) “Net working capital represents the excess of current assets over current liabilities and is...
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...BBC PVT. LTD. AND WORKING CAPITAL CHALLENGES | Case Study Report | Table of Contents * Case Background 3 * Key Findings 4 * Recommendations 6 * References 11 * Exhibits 11 Case Background BBC Pvt. Ltd, is a chemical manufacturing company that was established in 2004. It's registered offices are in Bangalore, and its manufacturing is in Lucknow. At the time of the case BBC is in need of working capital to secure a major contract with Indian Railways. The contract would open doors for long term business. BBC's product manufacturing required minimal fixed assets investment and high quality production. Their product was low cost high quality which is a great business strategy. They were able to provide to their customer the marginal price which made their product more attractive. Furthermore, most of their sales were on credit terms. BBC was very conservative with their working capital management. Its assets were ten times that of their liabilities. They repaid their creditors quickly before the credit period ended, but on the other token they were lenient with their customer’s credit terms. The excess credit to their customers caused excessive blockage to their working capital. Key Findings: BBC has a promising contract in their hands, but must invest a large amount of money immediately. We must determine how they can obtain and manage their funds to upgrade the facility to secure...
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...Lawrence Sports Working capital management is very important in running a business because it involves managing all current assets and liabilities. Working capital management involves making appropriate investments in cash, marketable securities, receivables, and inventories, as well as the level and mix of short-term financing (Emery, Finnerty, Stowe, 2007, p. 639, para. 3). Currently Lawrence sports, a multi-million dollar company that manufactures and distributes sports equipment is seeking a way to better manage its’ capital, lower loan burdens, and undertake better business deals with its’ three business partners. Management can solve this issue with working capital policies that reduce future difficulties. Alternative Working Capital Policies As the newly appointed finance manager, one must be fully aware of the companies operating expenses, principal source of finance, suppliers and current financial stance and process with the lending bank. Understanding how all of these relationships can cohesively work together is key to being a success in this new role. By being properly prepared and developing successful working capital policy, the company will always have balanced receivables and payables due to working and negotiating with Lawrence Sport’s customers and suppliers. This type of communication and action plan will result in optimizing revenue, decreasing cash borrowed turn-around time, positive business relations and maintaining positive cash balance thus...
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...Lawrence Sports Simulation Lawrence Sports 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...
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...Working Capital Structure and Financing Pattern of Mauritian SMEs Kesseven Padachi*; C. Howorth[1]; M. S. Narasimhan[2] and R. Durbarry3 *School of Business, Management and Finance University of Technology, Mauritius La Tour Koenig, Pointe – aux – Sables, Mauritius kpadachi@utm.intnet.mu ABSTRACT The competitive nature of the business environment requires firms to adjust their strategies and adopt good financial policies to survive and sustain growth. Most firms have an important amount of cash invested in current assets, as well as substantial amounts of current liabilities as a source of financing. This paper therefore analyses the working capital structure and financing pattern of small to medium-sized Mauritian manufacturing firms, using primarily secondary data. Structural differences in working capital and the financing pattern of the sample firms are analysed and the results showed significant structural changes over the study period. The research finding revealed disproportionate increase in current asset investment in relation to sales resulting in sharp decline in working capital turnover. The analysis also revealed an increasing trend in the short-term component of working capital financing; in particular trade credit and other payables have financed the major part of working capital. This over-concentration on short-term funds is a reality of the SMEs as they often faced difficulties in raising finance and they are viewed to be informationally opaque....
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...Corporation is trying to determine which financial policy, between aggressive, moderate, or conservative, will best fit their business. We will discuss these options and include the calculations that will show the expected rate of return on stockholders’ equity, net working capital position, and current ratio. According to Gitman (2009), profitability is “the relationship between revenues and costs generated by using the firm’s assets-both current and fixed-in productive activities” (p. 639). The firm chooses to increase their profits but must do so by increasing revenue and or decreasing cost. Risk is “the probability that a firm will be unable to pay its bills as they come due” (Gitman, 2009, p. 639). If a firm’s net working capital is high it is a lower risk because it has the funding to pay its bills. The trade-off between profitability and risk is done by changing current assets and current liabilities, separately, to identify the impact of each and decide which fits best with the firm. Expected Rate of Return on Stockholder’s Equity Expected rate of return on stockholder’s equity is determined by taking the percentage of return (profit) that was gained on each dollar that the stockholder invested. The calculation is net income divided by stockholders’ equity. In the model of Scott, shown in Table 1, we see that the expected rate of return for the aggressive policy is 6.89%, moderate policy is 6.81%, and conservative policy is 6.73%. These percentages show that, by using...
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...marks. NO. 1 COOKING LPG LTD DETERMINATION OF WORKING CAPTIAL Introduction Cooking LPG Ltd, Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a network of distributors in the districts of Gurgaon and Faridabad. The bottling plant of the firm is located on National Highway – 8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon. The firm has been consistently performing we.” and plans to expand its market to include the whole National Capital Region. The production process of the plant consists of receipt of the bulk LPG through tank trucks, storage in tanks, bottling operations and distribution to dealers. During the bottling process, the cylinders are subjected to pressurized filling of LPG followed by quality control and safety checks such as weight, leakage and other defects. The cylinders passing through this process are sealed and dispatched to dealers through trucks. The supply and distribution section of the plant prepares the invoice which goes along with the truck to the distributor. Statement of the Problem : Mr. I. M. Smart, DGM(Finance) of the company, was analyzing the financial performance of the company during the current year. The various profitability ratios and parameters of the company indicated a very satisfactory performance. Still, Mr. Smart was not fully content-specially with the management of the working capital by the company. He could recall that during...
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...MINIMIZING WORKING CAPITAL In the finance world, all successful firms efficiently manage their own working capital in many different ways. The term working capital originated with an old Yankee peddler who would load up his wagon and go off to peddle his merchandise (wares) for sale. This merchandise was called working capital because it was what he actually sold or turned a profit on to produce his profits. The wagon and the horse used are considered his fixed assets. He generally owned the horse and wagon, so those were always considered financed with equity capital, but his merchandise was always bought on credit, which was just like borrowing from the bank (his supplier). The more trips this peddler made each year, the faster his working capital grew. This was the start of working capital and is the main reason why a business places importance and finds 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)...
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...budgeting is an integral component for effective capital working policy (Emery, Finnerty, & Stowe, 2007). Establishing a cash budget is a means to observe a company’s inflow and outflow of cash, which in turn, will assist in adequate forecasting and planning, especially concerning when it comes to short-term credit (Emery et al, 2007). A high-quality working capital policy would also free up cash, which may be allocated to strategic areas for the company’s growth. LS must cease from financing shortages through credit lines with heavy reliance on selling inventory and receiving prompt payments. To understand the changes needed, a review of LS current policy will be analyzed and alternative working capital policies will be compared. Recommendations will be represented regarding which policy LS should implement. Alternative working capital policies The first alternative working capital policy is for LS to negotiate better collection on sales terms with Mayo Stores. The initial arrangement is to receive 20% collection on sales in the first week and 80% in the following week (University of Phoenix, 2012). The collection arrangement needs to be negotiated to 40% collection on sales in the first week and 60% in the following week. As an additional incentive, customers will receive 1% off their entire purchase if paid in full by the end of business on the seventh day. The second alternative working...
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...extent, thus minimizing the need for costly working capital. In past years, Dell has mainly financed its operations internally and secondly through the issuance of shareholder equity and small amounts of long term debt. Statement of Problem Being more flexible and responsive to market demands, Dell will bring new, superior products to market quicker than its competitors. This has created an expectation for large, double-digit growth in the upcoming year. Dell needs a plan for financing the large potential growth. Recommendations Dell has working capital advantages over its competitors which it should continue to pursue. Dell funded its FY 1996 growth both from internal and external funds. It was wise to seek external funding to support Dell’s healthy growth. If Dell were to grow by 50% in FY 1997, it is recommended to seek external funding for the amount not funded internally. Dell should issue debt and continue to take advantage of its strong internal cash conversion cycle to fund its continued growth. Dell should not reduce its external funding as it will limit its growth. Methods of analysis & Discussion (Q1) Dell’s advantageous working capital policy enabled the corporation to face its current growth. The Just-In-Time inventory system and Sales built to order allowed, reduced the cash conversion cycle and minimized the amount of capital Dell needed to finance its business. Compared to competitors, Dell working capital policy gave Dell the following advantages: •...
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...Lawrence Sports: Determination of Working Capital Policy University of Phoenix: Corporate Finance FIN/571 January 27, 2013 Course Facilitator: Troy Mahone Lawrence Sports is a multi-million dollar company that prides itself on its ability to manufacture and distribute quality sports equipment and protective gear. Their principal Customer, Mayo Corporation, has recently requested a repayment extension on their loan with the company. Mayo would like to pay 80% of the payments due for the weeks of March 17-23 and March 24-30 and no payments would be made prior to April 14-20. To allow this payment arrangement, Lawrence Sports would have a deficit cash position for the weeks of March 31-April 6, where they would have to take an additional loan to cover the $307,000 deficit. Additionally, they would incur an interest payment of $3,150 on the loan. For the week of April 7-13, a loan would have to be made to cover the $411,000 deficit with an additional interest payment of $3,690. Lawrence Corporation has already reached their $1.2 million credit limit level and they would, according to company policy, be unable to make additional loans. Lawrence Corporation greatly values the business relationship with Mayo Corp, and a decision must be made determining whether to allow a repayment extension based on the terms Mayo has stated, or come up with an acceptable plan, not only for Mayo Corp, but a plan that would be agreeable with all the parties involved. Allowing any extension...
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