Session 9 Case studies and Solutions Nursery Management Understanding and Managing Finance

Operating Cash cycle and Working Capital Requirements  Why might it be a good idea to minimise the the Operating Cash cycle and Working Capital Requirements?  Taking each of the major elements of Working Capital in turn, state whether these need to go up or down, and why.

Operating Cash cycle and Working Capital Requirements  The Operating Cash Cycle is the time between paying out money, and getting a return on that money. The faster we can do this, the more opportunities there are to re-invest the money and getting a return on it.  Working Capital is the net amount of money invested in short term assets. On each pass through the Working Capital cycle we generate profits. Therefore we need to ensure that the money we have invested here is working for us effectively, invested in the right things, and that it does not stay in one place for too long.

Stock, Debtors and Creditors  Stock needs to be reduced to the minimum possible that will still effectively allow the business to service customer requirements. ‘Stock’ absorbs Working Capital.  Trade Debtors need to be reduced to the minimum possible to allow us to maintain our customer base yet have the lowest amount of money locked up for the shortest time possible. ‘Trade Debtors’ absorbs Working Capital.  Trade Creditors should be increased to the largest amount possible without incurring penalties, or disadvantaging the business. ‘Trade Creditors’ releases Working Capital.

Managing Stock  What procedures and techniques are there for managing stock?  Describe some of these.  Can you give examples of companies who have used these techniques successfully?

Managing Stock- Activity  Consider the following stock control methods:  ABC Model,  EOQ Model,  MRP methods,  JIT Methods Discuss which type of business might benefit most from employing each of these methods. You should consider manufacturing, retail and service industries.

Managing Stock- Solution ABC Model Typically used where lots of different kinds of stock are held – either in retail, or at the start of a manufacturing process. Can be employed by service industries for managing items required for maintenance. EOQ Model Typically used where there are deliveries of large quantities of the same item, e.g fuel. Employed by manufacturing industries mainly. MRP Methods Used primarily in manufacturing as a method for scheduling production. Can be applied to some service industries, or to retailers who have seasonal variations (e.g. ASDA, Tesco etc.) JIT Methods Used primarily in those industries which can work to fixed schedules, and can make and keep to rigorous planning targets. Manufacturers with predictable customer requirements; retailers with stable customer demand patterns, service industries with steady maintenance needs.

Managing Credit - Activity What should a supplier look for when deciding whether to supply a business customer?  Explain the basis on which h a business might offer credit.  What sources of information are there which will allow a business to make judgements?  What criteria should we use in deciding how long a credit period to extend?

Offering Credit  Capital: Is the customer financially sound?  Capacity: Does the customer have the capacity to pay the amounts owed?  Collateral: Can the customer offer any security?  Conditions: What is the current economic climate?  Character: Does the customer appear to have integrity?

Credit: Sources of Information Trade references Some business ask customers to supply references from other businesses that have extended credit to them. Bank references It is possible to ask a bank for a reference, but these are not always informative. Published accounts A Limited Company is obliged by law to lodge accounts with the Registrar of Companies. The company itself It may be possible to interview directors, inspect the premises, interview employees. Credit Agencies Specialist Agencies exist to provide information about creditworthiness. Information is taken form accounts, court judgements etc.

Credit: Length of period allowed Credit conventions within the particular industry. Retailers often do not extend any credit; terms of 7 days, 30 days are common in many areas. Utilities work on 60 or 90 days. Degree of competition Lots of competition means that periods will tend to be generally longer. Bargaining power of particular customers Established customers, especially those who are creditworthy and who form a substantial proportion of your sales are in a position to negotiate lengthy credit payment periods. Risk of non-payment Very short periods (at most 7 days) under these circumstances. Capacity of business to offer credit Businesses operating on low levels of WC may not extend credit at all. Marketing Strategy New products or companies trying to become established might offer unusually lengthy credit periods, in order to gain a market foothold.

Debt Management- Activity Consider the following methods of Debt Management:  Ageing Schedule of Debtors,  Discounts for Early Payment,  Debt Factoring,  Invoice Discounting Discuss which type of business might benefit most from employing each of these methods. You should consider manufacturing, retail and service industries.

Debt Management-solutions Ageing Schedule of Debtors Useful tool where there are lots of different customers, all on different lengths of credit. Typically used in business to business trading. Discounts for Early Payment Typically used in manufacturing or where there are relatively high profit margins. Discounts can be expensive; if the company has a ROCE less than around 20%, it would be unlikely to benefit. Debt Factoring Used primarily in manufacturing in those industries where demand is unpredictable, operating on very low levels of working capital, or where the cash flow is tightly managed. Can be applied to some service industries, or to retailers with seasonal variations Invoice Discounting Used primarily in those industries which have a large, diverse customer base, where collection might otherwise prove complex and difficult.