Fundamentals of Credit Management -Working Capital

The only sustainability and ability for a company to stay in business is the amount of Cash and its equivalents which is like the supply of oxygen for the business to flourish. A company with a long overdue collection period is probably yet to decide on the maximum stretch in collectibles for the month to meet their working capital requirements. Cash is the interconnecting nodes in all the financial assets of the business somehow or the other as:

  • Profits reported are result of rules, assumptions. estimates
  • Assets reported in the balance may not be reality check which connects the financials
  • The Profit & loss to the Balance sheet are connected in terms of the credit sales in the P & L to the accounts receivable in the BS.

The basic of Credit is extended to:

  • Increased liquidity to the suppliers
  • Increased profits
  • Higher productivity
  • Increase in the purchasing power of the business
  • promoting the growth of the company

Credit control being an important function is an important and independent function which is existence and makes the marketing and sales functions diligently in the business to provide a positive result. The amount of cash tied up in the business trading assets is reflected in the working capital of the company. The three main components of the working capital requirements of a company are:

  • Day sales outstanding which are said to be the DSO or the amount of cash you have unpaid in the business tied up to the unpaid invoices from the customers. Most of the businesses offer credit to the customers to manage their own cash flow cycle and that the uncollected cash is the cost to the business.
  • Day’s payable outstanding or the DPO tells you how you are doing with the suppliers. The aim here is higher the number if your suppliers are lending you the money to buy their services; that’s the cash you can use elsewhere in the business.
  • Finally, your days of inventory or the DI tells how much cash you have tied up in stock and raw materials. Like DSO a lower DI is a better projection of the cash flow cycle in the business.

Almost all businesses have working capital tied up in receivables and inventory, however having a negative working capital sometimes reflects the cash available which can be invested to earn interest income.The business model to be successful demonstrates the importance of cash flow management.

 

 

 

 

 

 

 

 

 

Techniques Of Capital Budgeting

Capital budgeting is done in various ways. Some of the techniques used are:

  • The internal rate of return
  • Net present value
  • Profitability index
  • Real options valuation
  • Payback period
  • Accounting rate of return
  • Equivalent annual cost
  • Average accounting return
  • The modified internal rate of return

There are different methods adopted for capital budgeting.

Some Techniques and methods of capital budgeting explained

  • The payback period method

In this method, the word period refers to the time in which the proposal will start to generate cash to recover the initial investments that have been made. The method lays a lot of emphasis on the economic life of the project and the cash inflow. The investments that are made into the project is also emphasized on and there is no use of the time value of money in this method. The method helps to select a proposal based on what the earning capacity of the project is. There is some simple calculation involved which helps to select or reject a project and the result helps to determine what the risk involved is.

  • Accounting rate of return method – ARR

This method takes care of the shortcomings of the payback period method. The rate or return is expressed as what percentage it is of the earnings of the investment on a particular project. As per this method, any project that has an ARR that is higher than the minimum rate that is established will be considered and those that are below the minimum rate established gets rejected.

The method takes into consideration the complete economic life of the project and thus allows better comparison.The method, however, does not consider the time value of money as well as the length of the projects life.

  • The discounted cash flow method

The technique calculates the cash inflow as well as cash outflows throughout the assets life. This then gets discounted a discount factor is used to do the same. The discounted cash inflow, as well as the outflow, is compared and this method considers the interest as well as the return factor after the payback period.

  • The net present value of NPV method

The method is popular and it helps to evaluate the proposal of capital investment. The cash inflow that is expected in different time periods in the future is discounted at a rate. The present value of the cash inflow is compared to the original investment made. The difference needs to be positive for it to be accepted. The time value of money is considered and this is done in order to maximize the profit of the owner.

How To Trade The Stock Market Successfully

Many of us are ardent traders and we love to be in the market looking out for opportunities. But this does not authorize us to be the advisors elaborating the goodness of this field. There would still be people who would be doubting this field for its unpredictable fluctuations and this would keep them away from becoming a part of this. So what best could explain them the reasons for these fluctuations and make them understand that this is also a viable field for making investments? It is nothing but the various factors that affect and cause fluctuations in the stock market and these are believed to be the best justifications that would elucidate and explain the unexpected and sudden fluctuations.

A successful trading depends on how well a trader understands the market and also the factors that affect it. Now you can also become one if you get to the ones listed below for they are considered the major players in bringing in a change in the prices of the shares.

  • Economic condition– a change in the economic factors would bring in a huge change in the stock market. For example, an insurance company, that has been doing well so far has now been affected by the changes in the insurance policies and rates would actually become a very big and a perilous one for the entire industry as a whole.
  • Market information – it is said that for a trader to be successful in his stock and trade experiences, it is essential and expected of him that he gets all the latest information from the market. But here too there are certain traders who would look into those that are familiar to them irrespective of whether the others are beneficial or not. So based on this perception of the market the values of the assets or the stocks would get affected.
  • World events – this is another important factor that determines the drop or rise in stock prices. When a company announces the closing down of certain departments aiming at reducing the size or if it decides to lay off workers for the same reason, the value of their stocks would fall badly. In the same way, if there is anything bad or unexpected about a company`s performance, the stock or share prices of its competitors go high automatically.

So it is important that the traders take into account the very many various factors that would become the influencing factors in determining the stock prices.

Effects of inflation in business enterprises

When there is a continuous increase in the price level of goods and services, it is called inflation. It is measured as a change in the annual percentage. Under the period of inflation, the price of all the things keeps rising with time. It means every dollar you have could buy a lesser quantity of goods. Listed below are few ways it affects our business.

How the inflation affects

Reduces purchasing power– Inflation will result in reducing the purchasing power of business or people. What you could have procured earlier with a particular amount of money can be used now to buy a lesser quantity of the same. The price change would be the result of an increase in demand for the product because of the ever-increasing population and at the same time, there is a decrease in the supply of the product. The decrease in supply would be the result of a natural calamity, political unrest and so on.

Encourages investing and spending– The most predictable behavior of all the business enterprise, while there is an inflation, is to buy the goods now rather than planning to buy it later. Cash will be only losing the value in future. Hence it is best to stock up those goods which are predicted to increase the value in future. All the raw materials required for the business for which the price will increase has to be bought in advance.

Results in more inflation– The urge to buy things in advance and invest will result in boosting the inflation. As the business people try to spend as much as possible to lower the time they hold the depreciating currency, it will result in overflow of cash which no one wants. The supply of money exceeds the demand, again the currencies purchasing power falls at a very fast rate.

Cost of borrowing increases– In order to keep a control on the check, the interest rate will be increased. If the interest rates are low, it encourages businesses to take up more loan and in turn increases the spending. If the interest rates are high, it will keep a check on the loan application. The business organization will feel it is best to put money in the bank so that it will be able to earn interest. Hence the increasing of borrowing rate can to an extent keep a check on inflation as the overflow of money in the market will reduce.