Bus-Fpx4070 Assessment 7 Attempt 1

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Barstow Community College *

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FINANCIAL

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Finance

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Jan 9, 2024

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Minimizing Working Capital 1 Minimizing Working Capital Adiyah Williams Capella University Current assets are equal to working capital. Your purchases must exceed your current liabilities for your business to survive. Operating capital, sometimes called net working capital

Minimizing Working Capital 2 (NWC), is the difference between a business's current liabilities, such as debts and accounts payable, and its current assets, like cash and inventories of raw materials and completed goods. A company's ability to invest and expand based on liquidity, operational effectiveness, and short- term financial health is gauged by its net working capital. (Rathburn, n.d.) Current assets (fixed assets, inventory, cash) – current liabilities (payables, current debt) = working capital (cash, debt, inventory, operating expenses) Working capital indicates a business's ability to handle its finances. Able to promptly collect money from their clients and settle their debts. Reworking the policy on accounts receivable to read Net 30 would reduce the amount of potential discounts and past-due balances that exceed 30 days. By doing so, the income may rise, and the working capital may decrease. (Wei, n.d.) The average time it takes to realize incoming cash and to pay out payables is known as the cash conversion cycle. A corporation with less working capital may shorten its cash conversion cycle while still having current assets to pay for expenses. Cash flow improves when clients pay on time and the business may postpone costs for extended periods. Cash flow is up, and prices are down. Any business can run with less working capital and boost value for shareholders, investors, and creditors if it can create sales, collect customer payments, and postpone spending as long as possible. The accumulation of assets lessens the need for additional borrowing or debt. Controlling or optimizing inventory, cutting costs, accelerating the turnaround time for collections, and extending the terms on payable accounts. (Wei, n.d.) Reduced working capital may impact how stakeholders, investors, lenders, and staff perceive a company's financial records. Bigger businesses can survive longer than smaller businesses, even with weaker working capital. Larger enterprises with lower operating capital

Minimizing Working Capital 3 may lose their current suppliers, forcing them to choose new suppliers who might offer worse products at higher costs. The impact is more severe and harmful to the smaller business. They cannot pay workers, replenish, or increase their inventory to keep serving other companies. There are ways for smaller businesses that are compelled to operate with less working capital because of late payments from clients to support themselves. These businesses can increase prices, fire or lay off staff, pay vendors slowly, or request loans. (Rathburn, n.d.) 1. Due to price increases, Customers may look to other providers for better deals. 2. Laying off or terminating staff may result in a lower-quality product; overworked personnel may generate a lower-quality output. 3. Vendors that don't pay on time may be subject to a C.O.D. payment term or relationship termination. 4. When small businesses request financing, past-due receivables constitute a red flag for banks and lenders. They receive loans at significantly higher interest rates or are considered a credit risk. 5. A bigger rival will be more resilient to having past-due receivables on file for longer. Treasury managers need help with working capital management, which can be overcome with the appropriate techniques and resources. Treasury managers can maximize operating capital and propel financial success for their companies by tackling problems including data accessibility, inventory management, stakeholder alignment, and forecasting accuracy. As guardians of cash flow analysis, treasury managers are vital to an organization's financial performance. Through proactive problem-solving and creative thinking, they can spearhead initiatives to enhance working capital, cultivate confidence among stakeholders, and propel overall economic outcomes. (Hanumanthu, 2023)

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Minimizing Working Capital 4 Part 2: Receivables Investment In addition to your solution to each computational problem in this part of your assessment, you must show the supporting work leading to your solution to receive credit for your answer. ● If you choose to solve the problems algebraically, be sure to show your computations. ● If you use a financial calculator, show your input values.

Minimizing Working Capital 5 ● If you use an Excel spreadsheet, show your input values and formulas. XYZ Inc. sells on terms of 2/10, net 30. Total sales for the year are $1,000,000. Consider that 30 percent of the customers take discounts and pay on the 10th day, while the other 70 percent pay, on average, 45 days after their purchases. 1. What is the days' sale outstanding? Receivables / Annual sales / average days 70% of clients make payments in 45 days. 700,000 / (1,000,000 / 45) 700,000 / 22,222.23 = 31.5 days 30% of clients are 2/10, net 30 30,000 x .02 =600.00 30,000 – 600 = 29,400 29,400 / (1,000,000 / 10) = 29,400 / 10,000 = 2.94 days 2. Determine the average amount of receivables. Receivables / average days 700,000 / 45 = 15,555.56

Minimizing Working Capital 6 29,400 / 10 = 2,940 3. For the customers who take the discount, what is the percentage cost of trade credit? Receivables / average days 700,000 / 45 = 15,555.56 29,400 / 10 = 2,940 4. For the customers who do not take the discount and pay in 45 days, what is the percentage cost of trade credit? 2% / (100%- 2%) x (365 / 45) 2% / 98% x 8.12 2.0408 x 8.12 16.58% 5. What would happen to XYZ's accounts receivable if it created a new collection policy that required all non-discount customers to pay on the 30th day? Receivables / average days 700,000 / 30 = 23,333.34 That would result in a $23,333.34 – 15,555.56 = $7,777.78 increase in receivables collected. A 49.48% increase is required to convert the 45-day collection policy to a 30-day net

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Minimizing Working Capital 7 program. One way to reduce working capital would be to increase receivables at a shorter net due date. References Hanumanthu, T. (2023, May 25). Challenges of Working Capital Management (& How To Deal With It) . HighRadius. Retrieved January 2, 2024, from https://www.highradius.com/resources/Blog/challenges-of-working-capital-management/ Rathburn, P. (n.d.). Working Capital: Formula, Components, and Limitations . Investopedia. Retrieved January 2, 2024, from https://www.investopedia.com/terms/w/workingcapital.asp Wei, J. (n.d.). Advantages of Maintaining Low Working Capital . Investopedia. Retrieved January 2, 2024, from

Minimizing Working Capital 8 https://www.investopedia.com/articles/investing/103015/advantages-maintaining-low- working-capital.asp Why Working Capital Is Important . (n.d.). The Association for Financial Professionals. Retrieved January 2, 2024, from https://www.afponline.org/ideas-inspiration/topics/why- working-capital-is-important