Download Managing Finance and Budgets

Session 9
Case studies and Solutions
Nursery Management
Understanding and
Managing Finance
Operating Cash cycle and Working
Capital Requirements
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Why might it be a good idea to minimise the the Operating
Cash cycle and Working Capital Requirements?
Taking each of the major elements of Working Capital in
turn, state whether these need to go up or down, and why.
Operating Cash cycle and Working
Capital Requirements
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The Operating Cash Cycle is the time between paying out
money, and getting a return on that money. The faster we
can do this, the more opportunities there are to re-invest the
money and getting a return on it.
Working Capital is the net amount of money invested in
short term assets. On each pass through the Working
Capital cycle we generate profits. Therefore we need to
ensure that the money we have invested here is working for
us effectively, invested in the right things, and that it does
not stay in one place for too long.
Stock, Debtors and Creditors
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Stock needs to be reduced to the minimum possible that
will still effectively allow the business to service customer
requirements. ‘Stock’ absorbs Working Capital.
Trade Debtors need to be reduced to the minimum possible
to allow us to maintain our customer base yet have the
lowest amount of money locked up for the shortest time
possible. ‘Trade Debtors’ absorbs Working Capital.
Trade Creditors should be increased to the largest amount
possible without incurring penalties, or disadvantaging the
business. ‘Trade Creditors’ releases Working Capital.
Managing Stock
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What procedures and techniques are there for
managing stock?
Describe some of these.
Can you give examples of companies who have
used these techniques successfully?
Managing Stock- Activity
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Consider the following stock control methods:
 ABC Model,
 EOQ Model,
 MRP methods,
 JIT Methods
Discuss which type of business might benefit most
from employing each of these methods. You should
consider manufacturing, retail and service
industries.
Managing Stock- Solution
ABC Model
Typically used where lots of different kinds of stock are held – either in
retail, or at the start of a manufacturing process. Can be employed by
service industries for managing items required for maintenance.
EOQ Model
Typically used where there are deliveries of large quantities of the same
item, e.g fuel. Employed by manufacturing industries mainly.
MRP Methods
Used primarily in manufacturing as a method for scheduling production.
Can be applied to some service industries, or to retailers who have
seasonal variations (e.g. ASDA, Tesco etc.)
JIT Methods
Used primarily in those industries which can work to fixed schedules,
and can make and keep to rigorous planning targets. Manufacturers with
predictable customer requirements; retailers with stable customer
demand patterns, service industries with steady maintenance needs.
Managing Credit - Activity
What should a supplier look for when deciding
whether to supply a business customer?
Explain the basis on which h a business might
offer credit.
What sources of information are there which will
allow a business to make judgements?
What criteria should we use in deciding how long
a credit period to extend?
Offering Credit
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Capital: Is the customer financially sound?
Capacity: Does the customer have the capacity to
pay the amounts owed?
Collateral: Can the customer offer any security?
Conditions: What is the current economic climate?
Character: Does the customer appear to have
integrity?
Credit: Sources of Information
Trade references
Some business ask customers to supply references from other
businesses that have extended credit to them.
Bank references
It is possible to ask a bank for a reference, but these are not always
informative.
Published accounts
A Limited Company is obliged by law to lodge accounts with the
Registrar of Companies.
The company itself
It may be possible to interview directors, inspect the premises, interview
employees.
Credit Agencies
Specialist Agencies exist to provide information about creditworthiness.
Information is taken form accounts, court judgements etc.
Credit: Length of period allowed
Credit conventions within the particular industry.
Retailers often do not extend any credit; terms of 7 days, 30 days are
common in many areas. Utilities work on 60 or 90 days.
Degree of competition
Lots of competition means that periods will tend to be generally longer.
Bargaining power of particular customers
Established customers, especially those who are creditworthy and who
form a substantial proportion of your sales are in a position to negotiate
lengthy credit payment periods.
Risk of non-payment
Very short periods (at most 7 days) under these circumstances.
Capacity of business to offer credit
Businesses operating on low levels of WC may not extend credit at all.
Marketing Strategy
New products or companies trying to become established might offer
unusually lengthy credit periods, in order to gain a market foothold.
Debt Management- Activity
Consider the following methods of Debt Management:
 Ageing Schedule of Debtors,
 Discounts for Early Payment,
 Debt Factoring,
 Invoice Discounting
Discuss which type of business might benefit most from
employing each of these methods. You should consider
manufacturing, retail and service industries.
Debt Management-solutions
Ageing Schedule of Debtors
Useful tool where there are lots of different customers, all on different
lengths of credit. Typically used in business to business trading.
Discounts for Early Payment
Typically used in manufacturing or where there are relatively high profit
margins. Discounts can be expensive; if the company has a ROCE less
than around 20%, it would be unlikely to benefit.
Debt Factoring
Used primarily in manufacturing in those industries where demand is
unpredictable, operating on very low levels of working capital, or where
the cash flow is tightly managed. Can be applied to some service
industries, or to retailers with seasonal variations
Invoice Discounting
Used primarily in those industries which have a large, diverse customer
base, where collection might otherwise prove complex and difficult.