INVENTORY MANAGEMENT

NATURE AND IMPORTANCE 

Working capital as net concept, is defined as the difference between current assets and current liabilities. Current assets being those assets that are likely to be converted into liquidity within an year’s time or so and include items like inventories of raw materials, semi-manufactured articles or work-in-process, and finished goods, accounts receivable or dues from customers, hundies or bills receivable, bank balance and cash balance, etc.

 

Current liabilities are in essence short-term liabilities which have to be settles in a year’s time, e.g., accounts payable or amount payable to suppliers of goods and services delivered on credit, bills payable, bank overdraft, etc. Since inventories constitute a major item of current assets, the management of inventories is crucial to successful working capital management. Working capital requirements are influences by inventory holding-the period during which raw materials remain in store, that during which processing takes place and that during which finished goods lie in the warehouse prior to sale. The level of inventory investment affects the total investment in working capital. Thus, operating ratios, such as the ratio of Turnover or sales to Working Capital are affected by it as well.

 

Return on investment can be reviewed as follows:

Return/Investment = (Return/Sales) X (Sales/Investment)

Market Update

Weekly Recap – Week ending 26-Dec-08

From an investor’s standpoint, Wall Street didn’t bring any Christmas cheer this week.  Amid light trading conditions, the market dropped 1.7%, bringing its year-to-date decline to 41%.

It was a typical week in that we received another batch of dour economic news, saw oil prices continue to decline, and heard the Fed invoke its emergency powers again to lend stability to the financial system.  

In a front-end loaded week for economic data, it was reported that November existing home sales declined 8.6% from October and that new home sales of 407,000 units on an annualized basis hit their lowest level in 17 years.

Initial jobless claims surged to a 26-year high of 586,000, durable orders declined 1.0% in November, and personal income and personal spending fell 0.2% and 0.6%, respectively, in November.

Separately, MasterCard Spending Pulse said Friday that holiday sales from Nov. 1 to Dec. 24 declined as much as 4%, excluding autos and gasoline. 

Amazon.com (AMZN) for its part said 2008 was its best holiday season ever.  What that means for its income statement remains a mystery, but at least Amazon saw record order activity of its own.

Unfortunately, Amazon will be the exception and not the norm this holiday season.  Consumers have clearly become guarded with their spending activity in the face of concerns about rising unemployment, falling home prices, and much lower stock prices.

The final Q3 GDP report released this week indicated as much.  Real personal consumption expenditures declined 3.8% in the third quarter and knocked 2.8% off real GDP growth, which was negative 0.5% for the quarter. more… 

SIMULATION APPROACH

Still today we have discussed on cash management and credit analysis. Today we are going to discuss on Simulation Approach. Simulation analysis permits the financial manager to incorporate in his forecasting both likely value of ending cash balances (surplus/deficits) for each of the forecast periods (say, for each month over the next quarter) and the margin of error associated with this estimate. It involves the following steps: First, probability distributions for each of the major uncertain variables are developed. The variables would generally include sales, selling price, proportion of cash and credit sales, collection rates, production costs, and capital expenditures. Some of these variables have the greatest influence upon cash balances.

 

Clearly, more time and effort should be spent in obtaining probability distribution of these variables. Second, values are drawn at random for the variables from their respective probability distributions and using these values each balances are estimated. Third, the process is repeated several times (say, 1000times). Needless to say, such tedious and cumbersome computations are done on computer.

 

In practice, the array of possible hedging strategies is quite a bit more complicated. One is required to consider various alternatives and the associated costs and risks in hedging strategies.

Collection Rate Uncertainty

The firm is also faced with collection rate uncertainty. The firm may historically have collected an average of a certain per cent of its outstanding receivables from a particular period in another particular period, but this average contains considerable variability. Further, changing market and economic conditions may make extrapolation of past historic data into future periods a futile exercise.  

 

There is still another source of uncertainty – production cost uncertainty. The price of materials may change; production problems may arise that lead to increased labor costs; and errors in the sales estimates themselves would necessarily lead to forecasting errors in purchases – hence the volume of payables.  

 

Capital outflow uncertainty is one of the biggest sources of surprises in cash flow forecasting. This is the uncertainty regarding the timing of cash disbursement related to the firm’s major capital expenditure and constructions programmes. For instance, construction firms are notorious for filing late progress reports and then expecting immediate payment. While only a small per cent of the firm’s total bills are from capital construction programmes, the amounts involved are usually very large. One unexpected item of this sort can impair a carefully drawn cash flow forecast.  

 

An efficient way to deal with above uncertainties is to apply simulation analysis of the cash forecast. We will now briefly outline this method.

Source of Uncertainty in Cash Forecasting

Accurate cash flow forecasting hinges on the forecaster’s ability to reduce the amount if observed error between forecast values and actual values that have occurred. Given the short-run nature of the cash forecast, with most things occurring in the near future, one would tent to think that most financial transaction could be forecast very accurately. This is far from true.

 

In practice few firms, if any are able to forecast their inflows and outflows accurately. Sales forecasts are notoriously unreliable, for actual sales depend in part upon factors that lie outside the control of the firm. Changes in the marketing of competitive products, as well as changes in general economic conditions, can lead to large forecasting errors.

 

We may further note that any errors in sales forecasts have multiple impacts on the firm’s cash flows; they impact on receivable levels (and therefore collections) and also on production expenses (and therefore disbursements).

 

Issues and Approaches to Forecasting -3

We are talking Issues and Approaches to Forecasting. An useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts. We may, however, adopt a better and a more sophisticated approach.

 

In this, all collection rates are estimated simultaneously by regressing past sales figures against past collections. The estimated coefficients of the sales figures in the regression can be interpreted as the collection proportions, and the standard errors of the estimated regression coefficient as the uncertainty inherent in the estimation of these collection proportions.

 

In a situation where the firm is in multiple business lines, the use of overall payment patterns to forecast receipts will be accurate only when the proportions of total sales made in each business lines are constant. This is an unlikely situation, particularly since the different lines usually have different seasonal variations. In such a multiple situation, the most accurate forecasting result is achieved by forecasting receipts for the different units of the firm individually based on their own receipt patterns, then summing these receipts forecasts to obtain total cash receipts for the firm.

 

Issues and Approaches to Forecasting -2

We are talking Issues and Approaches to Forecasting from last two posts. There are four techniques for forecasting financial variables. Diret Method, Proportion of another Account, Compounded Growth, Multiple Dependencies. We talk on all of the above four techniques for forecasting financial variables.

 

Since cash forecast deal mostly with the near future, many of the items on the cash forecast are usually estimated by some variation of the post method. The bases of these spot estimated are usually the firm’s other financial plans. Remaining estimates are mostly on a ‘proportion of another account’ basis, the account often being particular period’s sales. The other two methods are employed less frequently.  

 

It is a common experience that forecast of disbursements is much easier than receipts, because the cash manager can rely on internal information and knowledge of payment knowledge of firm’s other plans (or budgets) and can make use of the forecasting techniques described above. However, a major challenge for him comes in estimating the receipts from the collection of the firm’s receivables. In this regard, an useful forecasting method is to analyze the historical payment patterns to determine the proportion of credit sales that are collected at various times after the date of sale, and then to use this information (along with the estimates of future sales) to project future receipts.

 

Issues and Approaches to Forecasting

An important question in short-term cash forecasting is what the length of the forest period to be forecast should be. This depends critically on the volume of the firm’s cash inflows and outflows. If the firm is sufficiently large, it will probably pay the firm to forecast on a daily basis. Small firms with lesser amounts to deal with are probably better off using a month or even a quarter as the length of their shortest period.

 

Most firms, however, to not confirm themselves to a single forecast; instead they use several forecast with periods of various lengths. In this context, the question arises how one forecast related to another. To see how this question arises, assume that a firm is practicing multiple period-length forecasting and is generating forecasts for the next quarter, months within this quarter, and weeks, within these months.

 

Does the forecast start with quarterly data and break this down into months, then break the months down into weeks, or does the forecast start with weekly data and aggregate this into months and quarters? Starting with data on relatively long periods and breaking it down into smaller periods is called distribution; starting with data on relatively short periods and aggregating into longer periods is called scheduling. Both the methodologies have advantages and disadvantages. Scheduling requires more data manipulation, but distribution required more sophisticated statistical techniques.

The most common approach to short-term cash forecasts is the receipts and disbursement approach. This method minutely traces the movement of cash and is preferred by firms that exercise very close cash control.

Cash Loans for bad credit

 

We are talking Credit Analysis, Credit Collection, Short term Investment and Cash Management in our previous post. We talk all those things with reference to business or commercial purpose. We workout working capital needs for business. We talk credit collection or cash management for business.

 Like business needs working capital management and planning, individual also need to plan for working capital or short term cash management. Last weekend I and my family were visiting a friend of us. When we were sitting together we were talking abut stock market and financial condition of AIG. We talked about AIG going to be bankrupt soon.

When we talked about AIG going to be bankrupt, he slowly speak up that he was running short on cash. Due to his past mistake he was having a bad credit which leaves him with very few options for purchasing necessities. He was suppose to pay home loan installment and also few other outstanding bills. He was proud and a private person so borrowing money from family members and friends were not going to happen. He was so nervous. He was just going to break his tears and cry with me.  I hold his hand and tell him don’t worry. There are many doors still open for you. I told him that kind of problem has its own solution it is very simple, so I suggested him not to be anxious, his problem can be resolve with a cash loans or installment loans from thinkcash.com.

He said in past he needed the  money and he took money from some cash advance company. He said the way they process my documents was so time consuming and lengthy and the rates were so high. I stopped him right away.  I asked him have you heard the name thinkcash.com. I told him about thinkcash.com. Thinkcash.com is a short term, personal loan company which lends amounts for emergency times and known for cash loans and installment loans.

As I am attached with finance industry in my professional life he knew the value of what I have told him. Thinkcash.com is quick, private and personal. The rates are typically 25-75% lower than payday loans and other loans providers available online. I told him that you can fill out application form online and the money wired by the next business day. Once you applied, all you have to do is to wait.  No need to fax or call an officer in charge for the status of your loan or even go for follow up. Isn’t it the fastest way rather than the others?

He asked me, what about repayment and penalties. If he doesn’t have money to pay off completely at a time, are there any penalties? Thinkcash.com cash loans can be paid on installment basis. The process is nicely streamlined. I want to give special annotation with this note; thinkcash.com is a no hassle loan company.

He was then very happy to know that there is still a solution for his short term financial needs.

Credit Analysis -2

Capacity is the ability of the customer to meet the obligations whenever they are due. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customers. That would reflect the long term ability of the customer to meet the obligations. In case the customer is not in a position to meet his obligation out of operations in some abnormal year, the company should examine the capital base of the company. This would indicate the capability of the company to face the problems in case of some difficulty. The company should examine the net worth of the customer to access the capital base. Credit card debt assistance companies help company to examine net worth of individual customer.

 

The market conditions play an important role when one is doing credit analysis. The expected recessionary trends in the market, growing competition and other market factors should be taken into account when doing credit analysis of the customer. Given a particular set of conditions, the costs associated with extending the credit may some times be high. The cost may get reflected in high bad debt expenses or the default in payments. And finally, the company has to examine the kind of security, debt assistance, collateral in the form of assets, the customer is providing.

 

There will always be a problem in obtaining financial and qualitative information about the customers. This problem arises because there is no systematic source of information particularly about the small sized customers. It may not be possible for most of the companies to administer the collection of information about the customers. Company can take help of company who give assistance with credit cards. The cost in terms of time and money resources involved in such experience would outweigh the benefits. But at the same time the company has to come o conclusion and satisfy itself that the customer to whom it is extending credit is worthy of it and the risks involved commensurate with the return.

Credit Analysis -1

No Company does blindly sell on credit to every customer approaching it. The company has to evaluate the capability of the customer and his strengths to fulfill the promise of paying the bills in time. The companies ignoring adequate analysis of their customer would soon find themselves in a situation not generating sufficient resources for day to day operation of the business. The company must analyze the risk of paying late or risk of default before extending credit. Credit given to Startup jobs employee carrying high risk compare to others.

 

The credit analysis would brodly involve the following three steps. 

• Getting financial and non financial information about the customer.
• Analyzing the credit worthiness of the customer and assessing the risk involved.
• Deciding to grant the credit. 

Analyzing the credit-worthiness of the customer is the most difficult task. The financial and no-financial information may provide some insights into the credit worthiness of the customer. With the help of this information and other insights the company has to access the following six C’s of Credit Worthiness: 

1. Character
2. Capacity
3. Capital
4. Condition
5. Cost
6. Collateral

 The analysis of credit worthiness begins with the assessment of the customer’s willingness to pay the bills of the company. Capacity is the ability of the customer to meet the obligations whenever they are due.  Startup jobs employees are having less credit worthiness. In this regard it would be important for the company to see that the obligations are met through the funds generated from the operations of the customer.

We continue our talk on Credit Analysis in next post.

Credit Standards & Credit Terms

We may take following approach in assessing the effects of lowering down the credit standards:

• Determine find out the profitability of additional sales
• Determine increase in bad debt losses, collection expenses,Credit Repair and any other cost arising from relaxing the standards
• Determine increase slowness of the average collection period and additional amount of investment required in accounts receivable and multiply it by the required rate of return on investment in accounts receivable.

Credit Terms

The other important dimension of accounts receivable management is to decide the terms of credit in advance. Sometimes Credit Repair Service helps to decide credit terms. The decision about the credit terms would involve the decision about the following variables:

1. Credit Period
2. Credit Limit
3. Cash Discount
4. Discount rate and Discount Period

Credit Period

Credit period is the time for which the company is willing to allow their customers not to pay their bills. By the end of the credit period the company expects that the customers would pay their bills. At any point of time there would be customers who may be interested in a longer credit period. If the company liberalizes its credit period the company may be able to attract such customers. But at the same time the extension of credit period means more investment in accounts receivable. Extension of credit sometime gives time forBad Credit Repair.

Credit Standards – II

At any point of time the company would be interested in examining the effect of change in credit standards. This is done by comparing the profitability generated by lowering down the credit standards and the added cost of accounts receivable. So long as the profitability is more than the added cost the company can lower down the credit standards. It is important to determine the costs of lowering down the credit standards and also to find out the impact on profitability of the company. Lowering down of the credit standards would have the following effects. 

• Increase in average collection period
  
• Increase in sales
  
• Increase in account receivable investment
  
• Increase in bad debt losses
  
• Increase in servicing cost of account receivable.

 

The effect of lowering down the credit standards on key variables such as sales and investment in accounts receivable can be quantified and can be used in analyzing the cost vs. benefits of such changes. Lowering down investment in life insurance is not lowering down credit standards. At the same time the costs such as increase in bad debt losses and increase cost of monitoring and servicing the accounts receivable should also be considered. It may be very difficult for the firm to make any distinction between the credit standards for new customers and existing customers. Relaxing the credit standards for the new customers would have certainly some impact on the payment behavior of existing customers. The firm may experience all this in increase in average collection period.

Credit Standards – I

Defining the credit standards is an important component of credit policy of the company. They credit standards do have an important bearing on the sales of the company. The credit standards of the company lay down minimum requirements for the evaluation of credit to its customers. The company may define these requirements in a evaluation of credit to its customers. The company may define these requirements in a very conservative or a strict manner and thus restrain the marginal customers in getting credit.

The marginal customers are those whose financial position are doubtful, may not really be bad. Such a policy would be appropriate for the companies which do not want to take high risk. Or, alternatively the company may follow a very liberal standard and be very aggressive in taking the risks. Lexington homes for sale might not help company to define credit standards.

The company may use some of the following quantitative indicators for establishing credit standards:

• Payment period
• Selected financial ratios
• Rating based on financial ratios

The subject assessment obtained through the market about credit worthiness of the customers may also features as one of the items in the credit standards. These quantitative and subject indicators may provide the basis for establishing and enforcing the credit standards.

We talk more in next post……….

Money Market

Though in term of institutions or players, the demarcation between money market and capital market is very thing, yet money market is said to constitute the pre-dominant source of working capital funds for business and industry. It is, therefore, we talk nature and functions of money market which is the pool or reservoir from which the suppliers of working capital finance to business and industry draw their working finance. scottsdale homes for sale helps business to manage their assets.

 

Nature and Functions of money market:-
 

The money market is a market for short-term financial assets that are close substitutes for money. If facilitates the exchange of money for new financial claims in the primary market as also for financial claims, already issued, in the secondary market. It provides a mechanism for meeting the liquidity needs of the lenders and the short-term requirements of borrowers with minimum transaction cost and delay.
There is strictly no demarcated distinction between the short-term money market and the long-term capital market, and in fact there are integral link between the two markets as the spectrum of instruments in the two markets invariably form a continuum. However, as a matter of practice, money market deals in financial instruments/arrangements which are for a short period not generally exceeding a maturity period of 180 days.

Managing Investment in Current Assets

Working Capital Management we are talking here. for any business as crm software or sfa software require same way working capital management is also required. Insurance Software helps insurance company to deal with it’s day to day business with help of insurance crm software, same way working capital management helps business to plan for their capital management.

Investment in Current Assets:-
Determination of appropriate level of investment in current assets is the first and foremost responsibility of working capital manager.  Although the amount of investment in any current asset ordinary varies from day-to-day, the average amount or level over a period of time can be used in determining the fluctuating and permanent investment in current assets. This distinction is of great import in devising appropriate financing strategies. We shall elaborate this point a little later.   Besides the level of investment, the types of current assets to be held are equally important decision variables. Think of the inventory of a dealer in construction equipment. The dealer must decide how many bulldozers to keep in stocks, as well as whether to stocks bulldozers or dump trucks.

From the viewpoint of the financial manager, all the decisions as to particular items add up to an average level of inventory for a given item, and these averages for all items add up to the total average inventory investment of the firm. Investment in receivables and marketable securities also pose a similar choice. The result is that there are a very large number of alternative levels of investment in each type of current asset.  

Therefore, in principle, current asset investment is a problem of evaluating a large number of mutually exclusive investment opportunities.

Ref: Insurance CRM Software, Insurance Software