《ACCA考试之财务管理 FINANCIAL MANAGEMENT》课件PPT 5 Managing working capital.ppt

PaperF9Financial Management Accounting School1ManagingworkingcapitalChapter52TopiclistManaginginventoriesManagingaccountsreceivableManagingaccountspayable3ExamguideQuestionsinthisareaarelikelytobeamixtureofcalculationsanddiscussionasinPilot Paperquestion3whichinvolvesatypicalevaluationofachangeincreditpolicyandanexplanationofthekeyareaofaccountsreceivablemanagement.41ManaginginventoryFastforwardAneconomicorderquantitycanbecalculatedasaguidetominimizingcostsinmanaginginventorylevel.Bulksdiscountscanhowevermeanthatadifferentorderquantityminimizinginventorycosts.51ManaginginventoryThescientificcontrolofinventoriesmaybeanalysedintothreeparts:Theeconomic order quantity(EOQ)modelcanbeusedtodecidetheoptimumordersizeforinventorieswhichwillminimisingthecostsoforderinginventoriesplusinventoryholdingcosts.Ifdiscounts for bulk purchasesareavailable,itmaybecheapertobuyinventoriesinlargeordersizessoastoobtainthediscountsUncertaintyindemandforinventoriesand/orthesupplyleadtimemayleadacompanytodecidetoholdbuffer inventoriesinordertoreduceoreliminatetheriskofstock-out(runningoutofinventory).6Economicorderquantity(EOQ)modelPatternofstocklevelsstockOrderquantityBufferstock0time7InventorycostsHoldingcostsThecostofcapitalWarehousingandhandlingcostsDeteriorationObsolescenceInsurancePilferageProcuringcostsOrderingcostsDeliverycostsShortagecostsContributionfromlostsalesExtracostofemergencyinventoryCostoflostproductionandsalesinainventoryCostofinventoryRelevantparticularlywhencalculatingdiscounts81.1ThebasicEOQformulaKeytermTheeconomicorderquantity(EOQ)istheoptimalorderingquantityforanitemofinventorywhichwillminimizecosts(orderset-up+holdingcosts).LetD=usageinunitforoneperiod(thedemand)C0=costofplacingoneorderCH=holdingcostperunitofinventoryforoneperiodQ=re-orderquantity9Economicorderquantity(EOQ)modelPatternofstocklevelsstockOrderquantity0time101.1ThebasicEOQformulaAssumethatdemandisconstant,theleadtimeisconstantorzeroandpurchasecostsperunitareconstant(i.e.nobulkdiscount)Theorderingcostsperorderareassumedtobeconstantregardlessofthesizesoforder.Thetotalorderingcostforaperiodissimplythecostperordertimesthenumberofordersforthatperiod.111.1ThebasicEOQformulaAssumethatdemandisconstant,theleadtimeisconstantorzeroandpurchasecostsperunitareconstant(i.e.nobulkdiscountandbufferinventory)Ifusageofaninventoryitemisatasteadyrateoveraperiodoftimeandthereisnosafetystock,andinventory(inunits)canbeexpressedas121.1ThebasicEOQformulaAssumethatdemandisconstant,theleadtimeisconstantorzeroandpurchasecostsperunitareconstant(i.e.nobulkdiscountandbufferinventory)holdingcostperunitofinventoryCH,arealsoassumedtobeconstantperunitoftheinventory,perperiodoftime.Thusthetotalholdingcostforperiodistheholdingcostperunittimestheaveragenumberofunitsofinventoryfortheperiod.131.1ThebasicEOQformulaThetotalcostsofinventoryOptimal order quantity theoptimalquantityofaninventoryitemtoorderatanyonetimeisthatquantity,thatminimizestotalinventorycostsoverourplanningperiod.141.1ThebasicEOQformulaTheoptimalnumbersofodersforaperiodThetotalcostsofinventoryinrelationtoEOQ151.1ThebasicEOQformulaTheinventorycycleThefundstiedupinEOQ161.3Uncertaintiesindemandandleadtimes:are-orderlevelsystemFastforwardUncertaintiesindemandandleadtimestakentofulfillordersmeanthatinventorywillbeorderedonceitreachesare-orderlevelRe-order level=maximumusage maximumleadtime171.3Uncertaintiesindemandandleadtimes:are-orderlevelsystemKeytermsLead-timeisthetimebetweenplacinganorderanddeliveryofthegoodsOrder pointthequantitytowhichinventorymustfallinordertosignalthatanordermustbeplacedtoreplenishanitem.181.3Uncertaintiesindemandandleadtimes:are-orderlevelsystemThere-orderlevelisthemeasureofinventoryatwhichareplenishmentordershouldbemade.Ifanorderisreplacedtoolate,theorganizationmayrunoutofinventory,astock-out,resultinginalossofsalesand/oralossorproduction.Ifanorderisplacedtoosoon,theorganizationwillholdtoomuchinventory,andinventoryholdingcostswillbeexcessive.Useofare-orderlevelbuildsinameasureofsafetyinventoryandminimizestheriskoftheorganizationrunningoutofinventory.Thisisparticularlyimportantwhenthevolumeofdemandorthesupplyleadtimeareuncertain.191.3Uncertaintiesindemandandleadtimes:are-orderlevelsystemTheaverageannualcostofsuchasafetyinventorywouldbe:quantityofsafetyinventory(inunit)Inventoryholdingcostperunitperannual201.4MaximumandminimuminventorylevelsKeytermsMaximum inventory level=re-orderlevel+re-orderquantity-(minimumusage minimumleadtime)Themaximumlevelactsasawarningsignaltomanagementthatinventoriesarereachingapotentiallywastefullevel.Minimum inventory levelorbuffer safety inventory=re-orderlevel-(averageusage averageleadtime)Theminimumlevelactsasawarningsignaltomanagementthatinventoriesareapproachingadangerouslylowlevelandthatstock-outarepossible.211.4MaximumandminimuminventorylevelsKeytermThisformulaassumesthatinventorylevelsfluctuateevenlybetweentheminimum(orsafety)inventorylevelandthehighestpossibleinventorylevel(theamountofinventoryimmediatelyafteranorderisreceived,safetyinventoryandre-orderquantity).Thisapproachassumesthatabusinesswantstominimizetheriskofstock-outatallcost.Inthemodernmanufacturingenvironmentstock-outcanhaveadisastrouseffectontheproductionprocess.221.4MaximumandminimuminventorylevelsForeachpossiblere-orderlevel,andthereforeeachpossiblelevelofbufferinventory,calculate:thecostsholdingbufferinventoryperannumThecostsofstock-outCostofonestock-out expectednumberofstock-outsperorder numberofordersperyearTheexpectednumberofstock-outsperorderreflectsthevariouslevelbywhichdemandduringtheleadtimecouldexceedthere-orderlevel231.6TheeffectofdiscountsDiscountmaybeofferedfororderinginlargequantity.Todecidemathematicallywhetheritwouldbeworthwhiletakingadiscountandorderinglargerquantity,itisnecessarytominimize:Total purchasing cost+ordering costs+inventory holding costsThe total cost will be minimized:At the pre-discount EOQ level so that a discount is not worthwhile,orAt the minimum order size necessary to earn the discount241.8Justintime(JIT)procurementKeytermsJIT procurement isatermwhichdescribesapolicyofobtaininggoodsfromsuppliersatthelatestpossibletime(i.e.whentheyareneeded)andsoavoidingtheneedtocarryanymaterialsorcomponentsinventory.JITanapproachtoinventorymanagementandcontrolinwhichinventoriesareacquiredandinsertedinproductionattheexacttimestheyareneeded.251.8Justintime(JIT)procurementIntroducingJITmightbringthefollowingpotentialbenefit:ReductionininventorycostsReducedmanufacturingleadtimeImprovedlaborproductivityReducedscrap/rework/warrantycostsReducedinventorylevelsmeanthatalowerlevelofinvestmentinworkingcapitalwillberequired.261.8Justintime(JIT)procurementJITattemptstoeliminatewasteateverystageofthemanufacturingprocess,notablybytheeliminationof:WIP,byreducingbatchsizes(oftenone)Rawmaterialsstock,bythesuppliersdeliveringdirecttotheshop-floorjustintimeforuseScrapandrework,byanemphasisontotalqualitycontrolofthedesign,oftheprocess,andofthematerialsFinishedgoodsstock,byreducinglead-timessothatallproductsaremadetoorderMaterialhandingcosts,byre-designoftheshop-floorsothatgoodsmovedirectlybetweenadjacentworkcenters.272ManagingaccountsreceivablesKeytermsA/Rarisefromtradecredit,anointerestloantocustomerThetermsofcreditaffectthelevelofaccountsreceivable.Tradecreditisamarketingtooltoattractbusiness.Thusneedtokeeptermscompetitive.Amarginalanalysisdetermineswhethertheexpectedbenefitsfromthechangeinthetermsofcredit(increasedsalesandprofits),outweightheincreasedcosts(financingfloattime,baddebtordiscountprice)282.1TotalcreditFastforwardOfferingcredithasacost:thevalueoftheinterestchargedonoverdrafttofundtheperiodofcredit,ortheinterestlostonthecashnotreceivedanddepositedinthebank.Anincreaseinprofitfromextrasalesresultingfromofferingcreditcouldoffsetthiscost.Findingatotallevelofcreditwhichcanbeofferedisamatteroffindingtheleastcostlybalancebetweenenticing,whoseuseofcreditentailsconsiderablecosts,andrefusingopportunitiesforprofitablesales.292.2EffectonprofitofextendingcreditThemaincostofofferingcreditistheinterestexpense.TheleveloftotalcreditcanthenhaveasignificanteffectonprofitabilityIfcreditconsiderationsareincludedinpricingcalculations,extendingcreditcanincreaseprofitability.Ifofferingcreditgeneratesextrasales,thenthoseextrasaleswillhaveadditionalrepercussionson:Theamountofinventorymaintainedinthewarehouse,toensurethattheextrademandmustbesatisfied.Theamountofmoneythecompanyowestoitsaccountpayable302.3CreditcontrolpolicyTheadministrativecostsofdebtcollectionTheprocedureforcontrollingcredittoindividualcustomersandfordebtcollectionTheamountofextracapitalrequiredtofinanceanextensionoftotalcreditThecostoftheadditionalfinancerequiredforanyincreaseinthevolumeofaccountreceivable(orthesavingfromareductioninaccountingreceivable)-thiscostmightbebankoverdraftinterest,orthecostoflongtermfunds.AnysavingoradditionalexpenseinoperatingthecreditpolicyThewayinwhichthecreditpolicycouldbeimplementedTheeffectofeasingcredit.312.4AssentingcreditworthinessFastforwardInmanagingaccountreceivable,thecreditworthinessofcustomersneedtobeassessed.Theriskandcostsofcustomerdefaultingwillneedtobebalancedagainsttheprofitabilityofthebusinessprovidedbythecustomer.Creditcontrolinvolvestheinitialinvestigationofpotentialcreditcustomersandthecontinuingcontrolofoutstandingaccounts.322.5ManagingaccountsreceivableFastforwarduRegularmonitoringofaccountsreceivableisveryimportant.Individualaccountsreceivablecanbeassessedusingacustomerhistoryanalysisandacreditraringsystem.uTheoveralllevelofaccountreceivablecanbemonitoredusinganagedA/Rlistingandcreditutilizationreport.Aswellasreportsonthelevelofbaddebts.AccountreceivablepaymentrecordsmustbemonitoredcontinuallyCreditmonitoringbyCreditratingsAcustomerspaymentrecordandtheaccountsreceivableagedanalysisshouldbeexaminedregularly.332.5ManagingaccountsreceivableExtensionofcreditTheextrasalesthatamoregenerouscreditpolicywouldstimulateTheprofitabilityofextrasalesTheextralengthoftheaveragedebtcollectionperiodTherequiredratesofreturnoninvestmentinadditionalA/R34CreditPolicyChangesGeneralprocedureEstimatethechangeinprofitEstimatethecostsofadditionalinvestmentinaccountsreceivableandinventoryEstimatethecostsofthediscount(ifachangeincashdiscountisenacted)Comparetheincrementalrevenueswiththeincrementalcosts.352.5ManagingaccountsreceivableExample:achangeincreditpolicy1.Profitabilityofadditionalsales=contributionmargin*additionalsales2.Additionalbad-debtlosses:=additionalsales*baddebtpercentage3.Additionalreceivables=additionalsales/newreceivableturnover4.Requiredbefore-taxreturnonadditionalinvestment=opportunitycost*additionalreceivables362.5ManagingaccountsreceivableExample:achangeincreditpolicy5.Additionalbad-debtlossesplusadditionalrequiredreturn:=(step2+step4)6.Incrementalprofitability:=step1-step6372.6CollectingamountowingFastforwarduThebenefitofactiontocollectdebtsmustbegreaterthanthecostsincurred.Baddebt lossSaturationpointCollectionexpenditure382.6CollectingamountowingCollectingdebtsisatwo-stageprocessHavingagreedcredittermswithacustomer,abusinessshouldissueaninvoiceandexpecttoreceivepaymentwhenitisdue.Ifpaymentbecomeoverdue,theyshouldbechased.InstitutingreminderorfinaldemandsChasingpaymentbytelephonemakingapersonalapproachNotifyingdebtcollectionsectionHandingoverdebtcollectiontospecialistdebtcollectionsectionInstitutinglegalactiontorecoverthedebtHiringexternaldebtcollectionagencytorecoverdebt392.7EarlysettlementdiscountsFastforwarduEarlysettlementdiscountsmaybeemployedtoshortenaveragecreditperiod,andtoreducetheinvestmentinA/Randthereforeinterestcosts.Thebenefitininterestcostsavedshouldexceedthecostofthediscountsallowed.uCashdiscountperiod-theperiodoftimeduringwhichacashdiscountcanbetakenforearlypayment.uCashdiscount-apercentreductioninsalesorpurchasepriceallowedforearlypaymentofinvoices.Itisanincentiveforcreditcustomerstopayinvoicesintimelyfashion.Keyterms402.8Example:settlementdiscountsDecisionsteps1.LevelofA/Rbeforecashdiscountchange=(annualcreditsales)/(oldreceivableturnover)2.NewLevelofA/Rassociatedwithcashdiscountchange=(annualcreditsales)/(newreceivableturnover)3.Reductionofinvestmentinaccountsreceivable=oldA/RlevelnewA/Rlevel4.before-taxcostofcashdiscountchange=cashdiscount*percentagetakingdiscount*annualcreditsales5.before-taxopportunitysavingsonreductioninreceivable:=opportunitycost*reductioninA/R6.Incrementalprofitability:step5-stept4412.8Example:settlementdiscountsThepercentagecostofanearlysettlementdiscounttothecompanygivingitcanbeestimatedbytheformula:Whered=thediscountofferedt=thereductioninthepaymentperiodindaysthatisnecessarytoobtaintheearlypaymentdiscount42Annualpercentagerate(APR)KeytermNominal(stated)interestrateisarateofinterestquotedforayearthathasnotbeenadjustedforfrequencyofcompounding.Ifinterestiscompoundedmorethanonceayear,theeffectiveinterestrateratewillbehigherthanthenominal.TherealrateofinterestisreferredtoastheannualorannualizedpercentagerateorAPR.43Annualpercentagerate(APR)EffectiveannualinterestrateTheactualrateofinterestearned(paid)afteradjustingthenominalrateforfactorssuchasthenumberofcompoundingperiodsperyear.Theeffectiveannualinterestrateistheinterestratecompoundedannuallythatprovidesthesameannualinterestasthenominalratedoeswhencompoundedmtimesperyear.Thereareusuallytworatesquotedbyfinancialinstitutions:NominalrateAnnualpercentagerate(APR),ortheeffectiverate44Annualpercentagerate(APR)TherelationshipsbetweennominalannualinterestrateandEffectiveannualinterestrate45Annualpercentagerate(APR)ui=thenominalinterestrateur=theeffectiveannualinterestrateum=thenumberofannualcompoundperiodsperyearun=thenumberofyears462.8Example:settlementdiscountsCostofmisseddiscount=1(1-d)n-1Costofmisseddiscount=(F/D)n-1D=percentagediscountofferedforearlysettlementN=365dividedbythenumberofdaysbetweenthetwopaymentdatesF=InvoicefacevalueD=dollardiscountofferedforearlypayment472.9BaddebtriskThehigherturnoverresultingfromeasiercredittermsshouldbesufficientlyprofitabletoexceedthecostof:Baddebt,andTheadditionalinvestmentnecessarytoachievethehighersalesExample:receivablemanagementCreditinsurance482.10FactoringFastforwarduSomefirmsusefactoringandinvoice discountingtohelpshorttermliquidityorreduceadministrationcosts.uInsurance,particularlyofoverseasdebts,canalsohelpreducetheriskofbaddebts.uFactoringisanarrangementtohavedebtscollectedbyafactorfirm,whichadvancesaproportionofthemoneyitisduetocollectuFactoring-Thesellingofreceivablestoafinancialinstitution,thefactor,usuallywithoutrecourseKeyterm492.10FactoringThemainaspectsoffactoringincluding:Administration of sales ledger-clientsinvoicing,salesaccountinganddebtcollectionserviceCredit protectiontoinsurethedebtofaclientagainstbaddebtrisk(non-recourseservice)Providing financemakingpaymenttotheclientinadvanceofcollectingthedebts(factorfinance).502.10FactoringTheprocessoffactoringClientdebtorsfactor1goods2sellsdebts4paythefactor3payupto85%ofbookvalueofinvoiceimmediately5paysbalanceoncollection512.10FactoringBenefitoffactoring1.thebusinesscanpayitssupplierspromptly,andsobeabletotakeadvantageofanyearlypaymentdiscountsthatareavailable.2.Optimuminventorylevelscanbemaintained,because