培训课程
Paper 2.4 讲义（Working capital management）
1. Working capital management.
1.1 Management of stock
1.1.1 Some basic formulae
stock holding period = average stock held/ cost of salesｘ365days
stock turnover = cost of sales/ average stock held
stock holding period= finished goods holding period + work in progress holding period + raw material holding period
EOQ(how much stock should be reordered)= (2CD/H) ½
C stands for fixed cost( order set-up costs) per order
D stands for expected annual sales volume
H stands for holding cost per stock unit per annum
Total annual cost of stock= holding cost + reordering cost
=(average stockｘH)+( Number of reorders paｘC)
average stock=EOQ/2,
number of reorders( it can be not an integer)= D/ EOQ
1.1.2 EOQ
1.1.2.1 Application of EOQ
A case : Hexicon plc manufactures and markets automatic washing machines. Among the many hundreds of components which it purchase each year from external suppliers for assembling into the finished article are drive belts, of which it uses 40,000 units pa. It is considering converting its purchasing, delivery and stock control of this item to a just-in-time system. This will raise the number of orders placed but lower the administrative and other costs of placing and receiving orders. Details of actual and expected ordering and carrying costs are given in the table below.
Actual Propsed
Ordering cost per order $ 100 $25
Purchasing cost per item $2.50 $2.50
Inventory holding cost 20% 20%
(as a percentage of the purchase cost)
To implement the new arrangements will require ‘one-off’ reorganization costs estimated at $4,000 which will be treated as a revenue item for tax purposes. The rate of corporation tax is 33% and Hexicon can obtain finance at 12%. The effective life span of the new system can be assumed to be 8 years.
(i) Determine the effect of the new system on EOQ;
(ii) Determine whether the new system is worthwhile in financial terms.
(i) Present EOQ =(2CD/H) ½=[(2ｘ$100ｘ40,000)/(20%ｘ$2.50)] ½
=4,000 units/order
Proposed EOQ = [(2ｘ$25ｘ40,000)/(20%ｘ$2.50)] ½
=2,000 units/order
From this it can be seen that the EOQ is halved.
(ii) First step: holding cost reduced=(4,000/2-2,000/2) ｘ$2.5ｘ20%
=$500
reordering cost reduced=40,000/4,000ｘ$100-40,000/2,000ｘ$25 =$500
total inventory cost reduced=$1,000 ( before tax)
Considering tax shield,
total inventory cost reduced=$1,000ｘ67%=$670
Second step: calculate NPV
Cash Discount Present
flow factor value
1-8 After tax savings $670 4.968 $3,329
0 cost of reorganization (4,000) 1.000 (4,000)
0 tax saving(again tax shield) 1,320 1.000 1,320
Net Present Value 649
As NPV is positive, this proposal is worthwhile.
1.1.3 JIT
1.1.3.1 The definition of JIT
JIT is a work flow organization technique to allow rapid, high quality, flexible production whilst minimizing stock levels and manufacturing waste.
1.1.3.2 The advantages of JIT, eliminating waste at following aspects:
(1) WIP, by reducing batch sizes
(2) Raw material stock, by the supplier delivering direct to the shop-floor just in time for use.
(3) Scrap and rework, by an emphasis on total quality control of design, of the process, and of the material.
(4) Finished goods stock, by reducing lead-times so that all products are made to order.
(5) Material handling cost, by re-design of the shop-floor so that goods move directly between adjacent work centers.
The combination of these advantages in JIT leads to:
(1) A smooth flow of work through the manufacturing plant.
(2) A flexible production process which is responsive to the customer’s requirements.
(3) Customer makes a long-term commitment to future orders.
(4) Reduction in capital tied up in stocks.
1.2 Management of debtor
A firm should establish a policy for credit terms given to its customers, and consider the harmony between sales improvement and cost of credit allowed.
1.2.1 Credit Policy
1.2.1.1 Establishment of credit policy
The period of credit extend will be set by reference to:
(1) elasticity of demand for the company’s products;
(2) credit terms offered by competitors;
(3) risk of bad debts resulting from extended credit periods;
(4) financing costs and availability of finance;
(5) costs of administrating the credit system.
1.2.1.2 Implementation of credit policy
(1) Assessing creditworthiness, sources of information are:
•Trade references.
•Bank references.
•Credit agencies and credit associations.
•Reports form salesmen.
•Information from competitors.
•Financial statements analysis.
•Credit scoring.
(2)Monitoring the credit system
•Age analysis
•Ratios
•Statistical data
1.2.3 Financing from debtors
1.2.3.1 Factoring
Finance factoring is where the factors makes a cash advance to the client, as well as conducting sales ledger administration and debt collection services.
(1) Comparison of the costs between existing policy and factoring offer.
In general, cost of existing policy at least includes:
•funding cost for debtor.
•administrative cost.
•bad debts loss
Cost of factoring offer probably includes:
•service charge
•interest of advance payment
(2) A case
A company has monthly credit sales of $200,000, and it gives customers 60 days credit. All customers take the full credit allowed. It has bad debts each year amounting to about 2.5% of sales turnover. It operates with a bank overdraft and pays interest at 8% on its overdraft balance.
The company s management is considering whether to use a factor to collect is debts, under a non-recourse factoring arrangement. A factor has indicated that it will take over the administration of the sales ledger and debt collection for a fee of 2% of annual credit sales turnover. This would save the company internal operating costs of $30,000 each year.
The factor would also charge 1.5% of turnover for credit insurance.
The factor will advance 80% of the value of invoices as soon as they are sent out, and charge interest at 7.75%.
If the services of the factor are used, it is anticipated that there will be no change in annual sales turnover and no change in the collection period of 60 days.
Required:
Assess the financial consequences of using the factor for non-recourse factoring and factor finance.
Step 1 Cost of existing policy
Funding cost= 2ｘ$200,000ｘ8% =$32,000
Bad debts loss= 12ｘ$200,000ｘ2.5%=$60,000
Administrative cost=$30,000
Total cost of existing policy=$122,000
Step 2 Cost of factoring offering
Service charge= 12ｘ$200,000ｘ2%= $48,000
advance payment charge= 2ｘ$200,000ｘ80%ｘ7.75%= $24,800
Reduced funding cost=2ｘ$200,000ｘ8%ｘ20%=$6,400
Credit insurance charge= 12ｘ$200,000ｘ1.5%=$36,000
Total cost of factoring offering=$ 115,200
Step 3 Make comparison
Net benefit= factoring offering- Cost of factoring offering
=$122,000-$ 115,200=$6,800
(2) Pros and cons of factoring offer
•firms can have access to flexible source of finance and improve cash flows by getting the finance provided by factors.
•saving administrative cost.
•firms can use the factor’s credit control system to assess the creditworthiness of customers.
•factors have experts of debtor management, who can be professional in collecting overdue debtors.
•Economy of scale.
However, factoring offer is still faced with some problems:
•endanger trading relationship and damage goodwill.
•when non-recourse factoring offer is selected, the firms lose control over decisions about granting favorable credit to its customers for the sake of other considerations.
•firms will possibly be questioned the financial stability.
1.2.3.2 Invoice discounting
(1) Definition: invoice discounting is a method of raising finance against the security of debtors without using the sales ledger administration services of a factor.
(2) pros and cons
1.3 Management of trade creditors
1.3.1 Costs associated with extending credit taken beyond the norm
•loss of discounts; (explicit cost)
•loss of supplier goodwill; (implicit cost)
•more stringent terms for future sales. (implicit cost)
1.3.2 Cost of discounts lost.
A Case A business is buying $1,000 worth of goods per moth and can take 2.5% discount if it settles accounts within one month. It will lose that source of supply if it delays payment for more than three months. An alternative supply of goods will be difficult to obtain in the event of the business getting a bad name.
To work out the cost to the business of taking the extra two months’ credit and losing the discount, carry out the following steps:
Step 1 discount available=2.5%ｘ$1,000=$25
Amount due if discount has been taken=$1,000-$25=$975
Step2 effective interesting cost of not taking the discount is:
Discount available/Discounted amount due=$25/$975=0.0256
Effective annual interesting rate=(1+0.0256)6-1=16.4%
Step 3 compared with the funding interest rate of the firms
1.4 Management of cash
1.4.1 Investment of surplus cash
1.4.1.1 Factors to be considered:
•liquidity: Available for use when needed;
•safety: No risk of loss must be taken;
•Profitability: Earn highest possible after tax returns.
1.4.1.2 Ways of investments
•certificate of deposit (CD);
•local authority bonds;
•Bank deposits with various kinds;
•Treasury bills are short term debt instruments;
•Finance house deposits.
1.4.2 Borrowing from the bank- overdraft
This will be discussed later in combination with the source of finance.
1.4.3 Cash management model
1.4.3.1 Baumol cash management model
x=2ｘannual cash disbursementsｘ cost per sale of securities
interest rate
EOQ model can be applied to this situation, x means the optimum regular cash
injection into the current account.
1.4.3.2 Miller-Orr management model
spread=3ｘ[(transaction costｘ3/4ｘvariance)/interest cost]1/3
transaction cost=per sale or purchase of gilts
variance of cash flow= (standard deviation per day)2
interest cost= interest cost per day
This model controls irregular movements of cash and sets the spread between the upper and lower cash balance limits.
Lower limit= set by the company;
Upper limit= lower limit + spread
Return point=lower limit + spread/3
1.5 cash operating cycle
cash operating cycle=stock holding period + debtor’s collection period - creditor’s payment period
Related ratio calculation and analysis will be discussed in combination with
performance measurement.
1.1 Management of stock
1.1.1 Some basic formulae
stock holding period = average stock held/ cost of salesｘ365days
stock turnover = cost of sales/ average stock held
stock holding period= finished goods holding period + work in progress holding period + raw material holding period
EOQ(how much stock should be reordered)= (2CD/H) ½
C stands for fixed cost( order set-up costs) per order
D stands for expected annual sales volume
H stands for holding cost per stock unit per annum
Total annual cost of stock= holding cost + reordering cost
=(average stockｘH)+( Number of reorders paｘC)
average stock=EOQ/2,
number of reorders( it can be not an integer)= D/ EOQ
1.1.2 EOQ
1.1.2.1 Application of EOQ
A case : Hexicon plc manufactures and markets automatic washing machines. Among the many hundreds of components which it purchase each year from external suppliers for assembling into the finished article are drive belts, of which it uses 40,000 units pa. It is considering converting its purchasing, delivery and stock control of this item to a just-in-time system. This will raise the number of orders placed but lower the administrative and other costs of placing and receiving orders. Details of actual and expected ordering and carrying costs are given in the table below.
Actual Propsed
Ordering cost per order $ 100 $25
Purchasing cost per item $2.50 $2.50
Inventory holding cost 20% 20%
(as a percentage of the purchase cost)
To implement the new arrangements will require ‘one-off’ reorganization costs estimated at $4,000 which will be treated as a revenue item for tax purposes. The rate of corporation tax is 33% and Hexicon can obtain finance at 12%. The effective life span of the new system can be assumed to be 8 years.
(i) Determine the effect of the new system on EOQ;
(ii) Determine whether the new system is worthwhile in financial terms.
(i) Present EOQ =(2CD/H) ½=[(2ｘ$100ｘ40,000)/(20%ｘ$2.50)] ½
=4,000 units/order
Proposed EOQ = [(2ｘ$25ｘ40,000)/(20%ｘ$2.50)] ½
=2,000 units/order
From this it can be seen that the EOQ is halved.
(ii) First step: holding cost reduced=(4,000/2-2,000/2) ｘ$2.5ｘ20%
=$500
reordering cost reduced=40,000/4,000ｘ$100-40,000/2,000ｘ$25 =$500
total inventory cost reduced=$1,000 ( before tax)
Considering tax shield,
total inventory cost reduced=$1,000ｘ67%=$670
Second step: calculate NPV
Cash Discount Present
flow factor value
1-8 After tax savings $670 4.968 $3,329
0 cost of reorganization (4,000) 1.000 (4,000)
0 tax saving(again tax shield) 1,320 1.000 1,320
Net Present Value 649
As NPV is positive, this proposal is worthwhile.
1.1.3 JIT
1.1.3.1 The definition of JIT
JIT is a work flow organization technique to allow rapid, high quality, flexible production whilst minimizing stock levels and manufacturing waste.
1.1.3.2 The advantages of JIT, eliminating waste at following aspects:
(1) WIP, by reducing batch sizes
(2) Raw material stock, by the supplier delivering direct to the shop-floor just in time for use.
(3) Scrap and rework, by an emphasis on total quality control of design, of the process, and of the material.
(4) Finished goods stock, by reducing lead-times so that all products are made to order.
(5) Material handling cost, by re-design of the shop-floor so that goods move directly between adjacent work centers.
The combination of these advantages in JIT leads to:
(1) A smooth flow of work through the manufacturing plant.
(2) A flexible production process which is responsive to the customer’s requirements.
(3) Customer makes a long-term commitment to future orders.
(4) Reduction in capital tied up in stocks.
1.2 Management of debtor
A firm should establish a policy for credit terms given to its customers, and consider the harmony between sales improvement and cost of credit allowed.
1.2.1 Credit Policy
1.2.1.1 Establishment of credit policy
The period of credit extend will be set by reference to:
(1) elasticity of demand for the company’s products;
(2) credit terms offered by competitors;
(3) risk of bad debts resulting from extended credit periods;
(4) financing costs and availability of finance;
(5) costs of administrating the credit system.
1.2.1.2 Implementation of credit policy
(1) Assessing creditworthiness, sources of information are:
•Trade references.
•Bank references.
•Credit agencies and credit associations.
•Reports form salesmen.
•Information from competitors.
•Financial statements analysis.
•Credit scoring.
(2)Monitoring the credit system
•Age analysis
•Ratios
•Statistical data
1.2.3 Financing from debtors
1.2.3.1 Factoring
Finance factoring is where the factors makes a cash advance to the client, as well as conducting sales ledger administration and debt collection services.
(1) Comparison of the costs between existing policy and factoring offer.
In general, cost of existing policy at least includes:
•funding cost for debtor.
•administrative cost.
•bad debts loss
Cost of factoring offer probably includes:
•service charge
•interest of advance payment
(2) A case
A company has monthly credit sales of $200,000, and it gives customers 60 days credit. All customers take the full credit allowed. It has bad debts each year amounting to about 2.5% of sales turnover. It operates with a bank overdraft and pays interest at 8% on its overdraft balance.
The company s management is considering whether to use a factor to collect is debts, under a non-recourse factoring arrangement. A factor has indicated that it will take over the administration of the sales ledger and debt collection for a fee of 2% of annual credit sales turnover. This would save the company internal operating costs of $30,000 each year.
The factor would also charge 1.5% of turnover for credit insurance.
The factor will advance 80% of the value of invoices as soon as they are sent out, and charge interest at 7.75%.
If the services of the factor are used, it is anticipated that there will be no change in annual sales turnover and no change in the collection period of 60 days.
Required:
Assess the financial consequences of using the factor for non-recourse factoring and factor finance.
Step 1 Cost of existing policy
Funding cost= 2ｘ$200,000ｘ8% =$32,000
Bad debts loss= 12ｘ$200,000ｘ2.5%=$60,000
Administrative cost=$30,000
Total cost of existing policy=$122,000
Step 2 Cost of factoring offering
Service charge= 12ｘ$200,000ｘ2%= $48,000
advance payment charge= 2ｘ$200,000ｘ80%ｘ7.75%= $24,800
Reduced funding cost=2ｘ$200,000ｘ8%ｘ20%=$6,400
Credit insurance charge= 12ｘ$200,000ｘ1.5%=$36,000
Total cost of factoring offering=$ 115,200
Step 3 Make comparison
Net benefit= factoring offering- Cost of factoring offering
=$122,000-$ 115,200=$6,800
(2) Pros and cons of factoring offer
•firms can have access to flexible source of finance and improve cash flows by getting the finance provided by factors.
•saving administrative cost.
•firms can use the factor’s credit control system to assess the creditworthiness of customers.
•factors have experts of debtor management, who can be professional in collecting overdue debtors.
•Economy of scale.
However, factoring offer is still faced with some problems:
•endanger trading relationship and damage goodwill.
•when non-recourse factoring offer is selected, the firms lose control over decisions about granting favorable credit to its customers for the sake of other considerations.
•firms will possibly be questioned the financial stability.
1.2.3.2 Invoice discounting
(1) Definition: invoice discounting is a method of raising finance against the security of debtors without using the sales ledger administration services of a factor.
(2) pros and cons
1.3 Management of trade creditors
1.3.1 Costs associated with extending credit taken beyond the norm
•loss of discounts; (explicit cost)
•loss of supplier goodwill; (implicit cost)
•more stringent terms for future sales. (implicit cost)
1.3.2 Cost of discounts lost.
A Case A business is buying $1,000 worth of goods per moth and can take 2.5% discount if it settles accounts within one month. It will lose that source of supply if it delays payment for more than three months. An alternative supply of goods will be difficult to obtain in the event of the business getting a bad name.
To work out the cost to the business of taking the extra two months’ credit and losing the discount, carry out the following steps:
Step 1 discount available=2.5%ｘ$1,000=$25
Amount due if discount has been taken=$1,000-$25=$975
Step2 effective interesting cost of not taking the discount is:
Discount available/Discounted amount due=$25/$975=0.0256
Effective annual interesting rate=(1+0.0256)6-1=16.4%
Step 3 compared with the funding interest rate of the firms
1.4 Management of cash
1.4.1 Investment of surplus cash
1.4.1.1 Factors to be considered:
•liquidity: Available for use when needed;
•safety: No risk of loss must be taken;
•Profitability: Earn highest possible after tax returns.
1.4.1.2 Ways of investments
•certificate of deposit (CD);
•local authority bonds;
•Bank deposits with various kinds;
•Treasury bills are short term debt instruments;
•Finance house deposits.
1.4.2 Borrowing from the bank- overdraft
This will be discussed later in combination with the source of finance.
1.4.3 Cash management model
1.4.3.1 Baumol cash management model
x=2ｘannual cash disbursementsｘ cost per sale of securities
interest rate
EOQ model can be applied to this situation, x means the optimum regular cash
injection into the current account.
1.4.3.2 Miller-Orr management model
spread=3ｘ[(transaction costｘ3/4ｘvariance)/interest cost]1/3
transaction cost=per sale or purchase of gilts
variance of cash flow= (standard deviation per day)2
interest cost= interest cost per day
This model controls irregular movements of cash and sets the spread between the upper and lower cash balance limits.
Lower limit= set by the company;
Upper limit= lower limit + spread
Return point=lower limit + spread/3
1.5 cash operating cycle
cash operating cycle=stock holding period + debtor’s collection period - creditor’s payment period
Related ratio calculation and analysis will be discussed in combination with
performance measurement.
