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Ch 15 Capital Management, Ch 15 Capital Management - Coggle Diagram
Ch 15 Capital Management
Capital Management
In light of the cost of capital, one are for managers to control efficiency is working capital management
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The manager must ensure that there is adequate cash on hand to meet the organization needs and also to minimize the cost of the cash
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How much cash to keep
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If we invest all of our cash in the business we would increase our returns- but then we wouldn't have cash for transactions and emergencies
At the other extreme, we can keep all our resources in cash, but then we wouldn't earn high returns
Managers must find a middle ground, trying to keep enough cash available, but not too much
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Ch 15 Capital Management
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Ordering Costs
If we kept relatively little inventory on hand to keep carrying cost low we will have to order inventory more often
Ordering costs:
- Cost of having employees place orders
- Shipping and handling charges for the orders
- Cost of correcting errors when orders are placed
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Carrying Costs
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Capital Costs: The greater your level of inventory the more you have paid out to suppliers, and the less money available to invest to generate returns
Out of pocket Costs:
- Rent on space where inventory is kept
- Insurance and taxes on the value of inventory
- Losses due to obolescence
- Cost of annual inventory counts
- Cost of damage, loss and theft
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Just In Time Inventory
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Advantages: no storage costs, reduced handling costs, minimum breakage, and no need to pay for inventory before you need it
Disadvantages: Increased ordering and shipping costs, and the risk that production lines will be stopped if inventory doesn't arrive just in time
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Trade Credit Terms
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A 1% cash discount is allowed if paid within 10 days otherwise the full purchase price is due within 30 days
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Banking Relationships
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It provides an opportunity to show the bank that your organization has thought through its working capital situation
- Ability to anticipate temporary cash needs before the cash is needed, and know when you'll have a surplus
In exchange for credit arrangements, many times banks require the organization to keep a certain amount of money in bank.