WORKING CAPITAL SIMULATION
LT10 – B
PHASE 1:
SELECTION CRITERIA:
In selecting what option to select the team came up with the following criteria: 1.) Selected option should lead to a reduction in working capital requirement and reduce short term debt in the process. 2.) Selected option should reduce the Cash Conversion Cycle. 3.) Selected option should free up locked capital in receivables and inventories. 4.) Selected option should lead to a zero working capital policy in the long run.
SELECTED OPTIONS:
We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit
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Combined they show a significant increase in EBIT with a lower increase in WCR. Although we foresee a significant increase in WCR we feel that the credit line we have and the amount of capital we freed from phase would be sufficient to reduce the impact of the additional WCR.
FINANCIAL RESULTS AND LEARNINGS:
Our choices led to a constant increase in net income over the three years. Short term debt increase by approximately 100% percent but steadily reduced over the next three years. We were happy with the positive growth of the company and the fact that we were able to pay off most of the initial short term funding required by the increase in working capital requirement. Overall the current situation of the company in 2018 is good, although the total value created is less than 20% of that created in phase 1. From this we learned that the value of the firm can be significantly increased more through a reduction in working capital requirement than through increasing the firm’s sales and net income.
PHASE 3:
SELECTION CRITERIA:
For this phase we decided to continue with the selection criteria from phase 1, and continue to try to increase sales with the minimum working capital requirement. We also decided to minimize risk and not go with options that have, however small, a chance of creating net losses for the company.
SELECTION OPTIONS:
Based on our analysis we felt that renegotiation of supplier credit
The company started off producing 20,000 units of mountain bikes. We did not change the production quantity. Last year our forecast sales were 24,000 when we only sold 19,866; therefore we thought it would be best to leave production at 20,000 bikes. Having excess inventory, we concluded that 20,000 units should be enough considering our quality has not changed and our advertising will not increase the sales dramatically. Although we had the choice to produce as much as 30,000 units, we felt as though we did not have sufficient money to increase production. We were interested in allocating the money towards marketing as opposed to production. We realized that without awareness, no matter how many units we make, sales would be inefficient.
This report will analyse and outline the company’s profitability, liquidity, solvency and investment potentials based on 15 ratios. All information is taken from the Next plc 2011 statement.
Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years. We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price
Next what catch my eye was an increase of amount of money owned by the business to the Creditors so this will be money leaving the business within the near future and if this continues to raise then the business will end up in huge debts. I have find out some improvements as well such as an increase in the amount investments in fixed assets, which could mean the business is investing more or more of the assets were sold from last year which is good news for a business.
2. to avoid the company dwindling away assets and further reducing any return to creditors.
To avoid the shortage of working capital, an estimate should be made in advance. The factors that should be considered to estimate working capital should be; the credit period expected to be allowed by a vendor, costs of material and wages of a project, the length of time that a product remains in a business, the length of the production and the period of credit allowed to a customer.
Moving onto the income statement portion of the common-size financial statements, an increase in cash and equivalents (3.20% of total assets in 1997 to 5.97% in 2001) and receivables (2.69% of total assets in 1997 to 3.22% in 2001) coupled with a decrease in inventory signify Costco’s improving efficiency over this five year period. It is important to mention two points. First, the decrease in inventory as a percentage of total assets from 30.8% in 1997 to 27.14% in 2001 signifies an increase in the turnover rate, perhaps due to
How much value do you expect to be created by operating improvements and capital structure changes envisioned by CD&R?
The most important thing is that, according to our estimation, the next five-year we will get additional funds needed increasingly with no surplus funds; which means, our assets increase faster than our liabilities. Therefore, our company goes well in the short term future based on this model. In conclusion,
This accounting policy will improve the preliminary financial statements drastically. Net income will be substantially higher; rather than expensing everything right away, we are matching the expenses with revenues. This better represents the earnings of the company. Additionally, the balance sheet will be show a higher amount of assets due to the capitalization of expenses. This will increase asset-to-debt ratios and improve the attractiveness of the company to investors.
The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s
free cash flow over the last eighteen months and our concomitant success in reducing the use of our line of
Conversely, looking at the income statement for PMWL, operating income shows healthy gains of $45,862, which means the operating expenses are significantly lower in comparison to AWBL’s. However, PMWL’s cost of goods sold appear abnormally high, which makes an investor question whether this company is at it’s maturity phase in the product life cycle, and how much additional capital is necessary to bring this figure down to a number that leverages economies of scale and allows for profit maximization.
Constructive result will show the business that it is able to pay off its short-term liabilities. In addition a high working capital also means that the company have the capacity to enlarge its operations.
The working capital necessities ought to be met both from transient too long haul wellsprings of trusts. It will be suitable to meet no less than 2/third (if not the) lasting's entire working capital prerequisites from long haul sources and just for the period required.