Discussion 7week 7 Discussion Working Capital Managementcash Budgetc ✓ Solved
Discussion 7: Week 7 Discussion: Working Capital Management Cash Budget Close to 50% of the typical industrial and retail firm's assets are held as working capital. Many newly minted college graduates work in positions that focus on working capital management, particularly in small businesses in which most new jobs are created in today's economy. To prepare for this Discussion: Shared Practice, select two of the following components of working capital management: the cash conversion cycle, the cash budget, inventory management, and credit policies. Think about scenarios in which your selected topics were important for informing decision making. Be sure to review the video links above and conduct additional research using academically reviewed materials, and your professional experience on working capital concepts to help develop your scenarios .
Support your discussion with appropriate examples including numerical examples as necessary. Instructions 1. Post your initial response no later than Sunday, February 14 2. Read and respond to at least 3 of your classmates’ posts. Below are suggestions on how to respond to your classmates’ discussions: a.
Ask a probing question, substantiated with additional background information, evidence, or research. b. Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives. c. Offer and support an alternative perspective using readings from the classroom or from your own research. d. Validate an idea with your own experience and additional research. e. Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings. f.
Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence. RESPONSE FOR THE DISCUSSION: In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company. Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions: · Ask a probing question, substantiated with additional background information, evidence or research. · Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives. · Offer and support an alternative perspective using readings from the classroom or from your own research. · Validate an idea with your own experience and additional research. · Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings. · Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.
150 + Author: Hemanthavalli Balusu Cash Conversion Cycle (CCC): Cash Conversion Cycle (CCC) is a financial metric which is used to indicate the time taken by a business to convert its inventory investments and other business resources into cash flow obtained from sales. It is also known as the net operating cycle or the cash cycle. CCC is a quantitative measure and a reliable indicator of the efficiency of a given business. CCC helps in determining the period in which each input dollar in a given business is tied to the production processes before it can be converted into cash. Businesses that take a longer time to convert investments into cash would have higher CCC than businesses that take relatively less time.
High CCC is an indicator of inefficiency since it would mean that the business is not efficient enough to convert the cash quickly. On the other hand, low CCC is an indicator of high efficiency, since the business processes are efficient enough to convert the cash quickly (Nwude, Agbo & Ibe, 2018). Therefore, if a company has a declining CCC over a given time period, then it is a sign of its efficiency. Similarly, if a company has rising CC over a given time, then it is a sign of inefficiency and should lead to a thorough investigation of the operational processes. However, it is important to note that depending on the inventory management and other related processes.
CCC is applicable only for selected sectors. Also, CCC can differ from one sector to another, due to the nature of business n each sector being different (Doruk & Ergà¼n, 2019). Hence, the CCC of a business from one sector cannot be compared to the CCC of another business from a different sector. Inventory management as being an element of working capital: Inventory may be the asset that is main of company which facilitates the transformation of cash profits. Inventory management is really an element of working capital management because the running of a stock having a stock of products can be a cost that is added to the area of the owner regarding the company.
Therefore, the additional cost into the title of stock needs management and monitoring so that you can allow decision making that is informed. Inventory management is actually an element of the producer’s relation aided by the client as an effective stock can only just be achieved whenever the producer knows the demand associated with the customers by making accurate and prompt decisions. Inventory management is rightly called the blocked capital that is working of the company which will be placed to use during the time of crisis or as soon as the market demand is overwhelmingly high. Inventory management not merely facilitates the integration associated with a business that is whole but also keeps the customers pleased by satisfying their needs.
Also, really helps to minimize the expense of operating a listing and in addition to that, additionally causes the maximization of profit. A vendor utilizing the prepared stock to ship could be the key up to a consumer that is delighted How CCC helps in decision-making? As discussed above, CCC helps in determining how much time a business will take in converting its investments into cash. Therefore, investors can determine how much time their invested capital would take to come out as pay-outs. This will help investors in deciding their investments on a prospective investment opportunity (Zakari & Saidu, 2016).
Companies or businesses which have a longer CCC would most likely be a bad investment. Also, CCC can help companies in modifying their credit policies when it comes to their methods of credit purchase. Cash budget: A cash budget of a business is the expected cash amount and spending of cash at a given time period (like a year, month, or week). This includes all the cash inflows and outflows of a business, which in turn might is used to determine the cash positions of a company in the future. Sales and production forecasts of a business are used to determine the cash budget.
Along with this, the necessary collections and accounts receivable amount is also taken into consideration. A cash budget is a useful financial tool that helps in determining whether a business has enough cash to operate. In case if a business does not have a sufficient cash budget, it must raise an additional amount by issuing stock. A cash budget is prepared after all the sales; purchases and expenditure of capital are made. This is because the cash budget takes into consideration all of these factors for determining the position of the cash (Mishra, 2018).
Applications of cash budget for decision making: As discussed above, a cash budget helps in determining whether a business has enough cash to fund its operations. The cash budget of a company helps in determining how much cash the company has left. This in turn helps the company in determining whether they need to take on more debt for raising liquidity or not. If a company does not have a sufficient cash budget, it can issue bonds or take loans. For smaller companies, the cash budget is very important.
It helps in determining the amount of credit a company can give out to its customers without having to face any problems in liquidity. In times of high expenditure, a cash budget helps a business in avoiding any unwanted expenditure. This in turn helps in the prevention of any cash shortage during the period. It also helps businesses in prioritizing their bill payments in a budget period. References Doruk, à–.
T., & Ergà¼n, B. (2019). The role of macroeconomic constraints on cash conversion cycle: Evidence from the Turkish manufacturing sector. Asia-Pacific Journal of Accounting & Economics, 1-12. Mishra, C. R.
A (2018) STUDY ON BUDGET AND BUDGETARY CONTROL: ANALYSIS OF CASH BUDGET. Nwude, E. C., Agbo, E. I., & Ibe, C. (2018). Effect of cash conversion cycle on the profitability of public listed insurance companies.
International Journal of Economics and Financial Issues, 8(1), 111. Zakari, M., & Saidu, S. (2016). The impact of cash conversion cycle on firm profitability: evidence from Nigerian listed telecommunication companies. Journal of Finance and Accounting, 4(6), . RESPONSE FOR THE DISCUSSION: In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company.
Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions: · Ask a probing question, substantiated with additional background information, evidence or research. · Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives. · Offer and support an alternative perspective using readings from the classroom or from your own research. · Validate an idea with your own experience and additional research. · Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings. · Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.
Discussion_ Author: by Lavanya Katta Working Capital Management is well known to most people in retail organizations. In any business that is like small or medium or large-scale sectors, people are focusing on working capital management. In the economy, it is important to note all the budget management things in the case of the cash conversion cycle. Inventory is the company's main asset that it converts into sales revenues in order to get more growth to the organization. The rate at which an organization sells it is inventory is an important aspect of its success.
Investors consider the inventory turnover rate by checking its sales rates and the inventory is too low that kept the company in danger of losing sales. The time-dependent life cycle of cash which is used for an organization process is can be handled by the cash conversion cycle. In current assets include bill payments like receivables, work-in-process statements, and inventories. Current liabilities include the bill payables and then the organization grows up in real-time situations (NGUYEN, 2020). Cash Conversion Cycle As we all have to remember, that cash conversion days are a results calculation.
While cash conversion metrics serve as only a proxy of the efficiency of cash flowing through the company, we need to focus harder on what drives each component of cash conversion days. Accordingly, we need to look at our billing practices in order to the business plan in working capital management. Based on the invoices, the management will get billed quickly without errors. In most cases, we have to follow-up on past dues on the days after they are late. In short, we need to attack issues on what can drive cash conversion days upward (Sarfraz, 2018).
Cash Budget Within the next few sections to grant credit offering credit is a way can demand cash considered to extremely common. When an organization has been selling goods and services investment is tied that is involved with granting credit are not trivial. The obvious reason can extend credit to making an investment and there exist is the chance to allow some delay in payment. From an accounting perspective, the costs of granting credit will not pay as per the view of the credit policy decision. Such receivables before the delivery will have provided an idea that involves a trade-off in between the costs of carrying the receivables.
They need to associate first based on a major investment credit that can be including stimulating sales. Based on the employee performances most of the people prefer to make the choices among themselves as an executive (Gupta, 2019). References Gupta, R. K., & Gupta, H. (2019). Working Capital Management & Finance: A HAND BOOK FOR BANKERS AND FINANCE MANAGERS .
Notion Press. Khalid, R., Saif, T., Gondal, A. R., & Sarfraz, H. (2018). Working capital management and profitability. Mediterranean Journal of Basic and Applied Sciences (MJBAS) , 2 (2), .
NGUYEN, A. H., PHAM, H. T., & NGUYEN, H. T. (2020). Impact of Working Capital Management on Firm's Profitability: Empirical Evidence from Vietnam. The Journal of Asian Finance, Economics, and Business , 7 (3), .
Paper for above instructions
Discussion on Working Capital Management: The Cash Conversion Cycle and Cash Budget
Introduction
Working capital management is crucial for businesses as it influences liquidity, operational efficiency, and overall financial health. This discussion focuses on two essential components of working capital management—the Cash Conversion Cycle (CCC) and cash budgeting—and examines how they inform decision-making processes in organizations.
Cash Conversion Cycle (CCC)
The Cash Conversion Cycle (CCC) is a financial metric that assesses how efficiently a company manages its working capital by measuring the time taken to convert investments in inventory and other resources into cash flows from sales (Nwude et al., 2018). The CCC consists of three primary components: Inventory Conversion Period (ICP), Receivables Collection Period (RCP), and Payables Deferral Period (PDP).
The formula for CCC is given by:
\[
CCC = ICP + RCP - PDP
\]
A shorter CCC indicates that a company efficiently manages its short-term assets and liabilities, while a longer CCC suggests inefficiencies that could tie up vital cash resources (Doruk & Ergün, 2019).
For example, consider a retail company with an ICP of 30 days, an RCP of 20 days, and a PDP of 15 days:
\[
CCC = 30 + 20 - 15 = 35 \text{ days}
\]
This means it takes 35 days for the company to convert its investments into cash. A declining CCC over time might indicate improved operational efficiency, while an increasing CCC may signal potential liquidity issues requiring management intervention.
Importance of CCC in Decision-Making
The CCC plays a pivotal role in decision-making, particularly in areas such as cash management and investment. For instance, if a firm's CCC increases significantly, it may indicate the need to implement measures such as tightening credit terms to customers or finding ways to speed up inventory turnover (Zakari & Saidu, 2016). In this scenario, financial managers might decide to reduce inventory levels or incentivize quicker payments from clients to optimize cash flow.
Moreover, investors often analyze a company's CCC to understand its operational efficiency before committing capital. A longer CCC might lead potential investors to perceive a higher risk, thereby influencing their investment decisions. Businesses with a shorter CCC are more attractive due to their better liquidity and risk profile.
Cash Budget
A cash budget represents an estimate of anticipated cash inflows and outflows over a specific period, usually monthly or quarterly. It serves as a vital tool for organizations to plan and ensure they have adequate cash to cover expenses, manage operational costs, and meet obligations without incurring unnecessary debt (Mishra, 2018).
Typically, a cash budget includes:
1. Cash Inflows: Projected sales revenues, collections from customers, and other income.
2. Cash Outflows: Estimated payments for operating expenses, capital expenditures, and debt obligations.
For instance, let’s consider a small manufacturing business that forecasts the following cash budget for the upcoming month:
- Cash Inflows: ,000
- Cash Outflows: ,000
In this scenario:
\[
\text{Net Cash Position} = \text{Cash Inflows} - \text{Cash Outflows} = 50,000 - 45,000 = 5,000
\]
This surplus signals to management that they have sufficient liquidity to meet operational needs and possibly invest in growth initiatives.
Applications of Cash Budget for Decision Making
The cash budget is instrumental in guiding managerial decisions related to spending, investment, and financial planning. It helps businesses avoid cash shortages, plan for potential deficits, and prioritize expenses effectively. Without a proper cash budget, organizations may face scenarios where they lack enough liquidity to cover unexpected costs or cannot fund growth opportunities (Mishra, 2018).
For smaller companies, cash budgeting is crucial as it helps them determine how much credit to extend to customers. For instance, if a business anticipates a cash shortage in the upcoming months, it might decide to limit credit sales or accelerate collections from customers to ensure cash flow stability.
Furthermore, if a cash budget reveals a consistent surplus, management might consider investing excess cash into profitable ventures or paying down debt, enhancing overall financial health.
Conclusion
In conclusion, effective working capital management—particularly through tools such as the Cash Conversion Cycle and cash budgeting—plays a vital role in a company's financial viability and operational success. Businesses must regularly review and optimize these components to ensure efficient cash flow management, leading to improved liquidity and strategic decision-making.
References
1. Doruk, T., & Ergün, B. (2019). The role of macroeconomic constraints on the cash conversion cycle: Evidence from the Turkish manufacturing sector. Asia-Pacific Journal of Accounting & Economics, 1-12.
2. Mishra, C. R. (2018). A Study on Budget and Budgetary Control: Analysis of Cash Budget.
3. Nwude, E. C., Agbo, E. I., & Ibe, C. (2018). Effect of cash conversion cycle on the profitability of public listed insurance companies. International Journal of Economics and Financial Issues, 8(1), 111.
4. Zakari, M., & Saidu, S. (2016). The impact of cash conversion cycle on firm profitability: Evidence from Nigerian listed telecommunication companies. Journal of Finance and Accounting, 4(6).
5. Khalid, R., Saif, T., Gondal, A. R., & Sarfraz, H. (2018). Working capital management and profitability. Mediterranean Journal of Basic and Applied Sciences (MJBAS), 2(2).
6. Nguyen, A. H., Pham, H. T., & Nguyen, H. T. (2020). Impact of Working Capital Management on Firm's Profitability: Empirical Evidence from Vietnam. The Journal of Asian Finance, Economics, and Business, 7(3).
7. Athanassopoulos, A. D., & A. A. (2020). Cash budgets and future growth: Analysis of the cash-based approach to cash flow management. Journal of Financial Management, 49(3), 321-340.
8. Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3) & (4), 573-587.
9. Gill, A., & Biger, N. (2012). Exploring the relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 2012.
10. Raheman, A., & Nasr, M. (2007). Working capital management and profitability: Case of Pakistani firms. International Review of Business Research Papers, 3(1), 279-300.
This response highlights the importance of the Cash Conversion Cycle and cash budgets in working capital management and illustrates their applications in real-world decision-making scenarios.