Financial Planning - Launching of Small Business

Financial Planning

Working Capital Management

•         Working capital management is concerned with making sure we have exactly the right amount of money and lines of credit available to the business at all times

•         Working Capital is the money used to make goods and attract sales

•         The less Working Capital used to attract sales, the higher is likely to be the return on investment

•         Working Capital = Current Assets − Current Liabilities

Working Capital Management

•         Cash Management

•         Receivables Management

•         Inventory Management

Cash Management

•         Identify the cash balance which allows for the business to meet day to day expenses reduces cash holding costs

Receivables Management

•         Money which is owed to a company by a customer for products and services provided on credit

•         Identify the appropriate credit policy

•         Inventory Management

•         Identify the level of inventory which allows for uninterrupted production

•         Reduces the investment in raw materials, minimizes reordering costs and hence increases cash flow

Inventory Management

A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily.

Policies, procedures, and techniques employed in maintaining the optimum number or amount of each inventory item. The objective of inventory management is to provide uninterrupted production, sales, and/or customer-service levels at the minimum cost.

Techniques: -

•         ABC

•         JIT

•         FSN

•         VED

•         BILLS OF MATERIAL

•         BIN CARDS

•         EOQ-ECONOMIC RE-ORDER QUANTITY

•         INVENTORY/TURNOVER

Inventory Management

Importance:-

–  TRANSCATIONS MOTIVE:

It emphasizes the need to maintain inventories to facilitate smooth production and sales operations

–  PRECAUTIONARY MOTIVE: -

It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors

–  SPECULATIVE MOTIVE: -

It influences the decision to increase or reduce inventory levels to take the advantage of price level fluctuations

Conflicting needs : -

– To maintain a large size of inventories of raw materials and WIP for efficient and smooth production and of finished goods for uninterrupted sales operations

–  To maintain a minimum investment in inventories to maximize profitability

Objective: -

–  determine and maintain optimum level of inventory investment

–  to maintain sufficient inventory for the smooth production and sales operations

–  to avoid excessive and inadequate levels of inventories

–  Making adequate inventories available for production & sales when required.

Benefits of holding inventories:

Avoiding losses of sales avoid non-supply of goods at times demands by understands.

Reducing ordering costs cost associated with individual order such as typing approving mailiyet can be reduced.

Achieving efficient production run Supply of sufficient inventories protects against shortage of raw materials that may interrupt production operation.

Cost of holding inventories:-

Ordering cost cost which are associated with placing of orders to purchase raw materials & components. Salary, rent. “More the order the more will be ordering costs vice verse”.

Carrying costs      cost involved in holding or carrying inventories like insurance. Charger for covering risk, thefts. It includes opportunity cost.

Money blocked in inventories been invested. It would earn a certain return. Loss of such return may be considered opportunity cost.

Models of inventory mgt:-

Several models & methods have been developed in recent past for determing the optimum level of inventories.

Classified into two types:-

Deterministic models:-

There is no uncertainty associated with demand supply of inventory.

Probabilistic models:-

It always some degree of uncertainty associated with demand pattern & lead times of inventories.

Unusually deterministic models associated:

Economic ordering quantity.(EOQ)

ABC analysis.

Inventory return over ratio.

EOQ:

Important decision to be taken by a firm in inventory mgt is how much to buy at a time. This is called EOQ.

EOQ give solution to other problem like: How frequently to buy? When to buy? What should be the reserve stock?

Assumptions:-

EOQ is based on certain assumption.

The firm knows how much items of particular inventories will be used or demanded. Use of inventories/sales made by the firm remains constant, or unchanged.

The moment inventories reach the zero level, the order of inventory is placed without delay. These assumptions are also called limitations of EOQ.

Determination of EOQ:-

Ordering cost:

Cost concerned with the placing of an order to acquire inventories. Yes it way from time to time depending upon the no of items orders places & no of items ordered in each order.

Carrying cost:

Cost related to carrying or keeping inventories in a firm.

Ex: interest on investment, obsolescence, losses, insurance, premium.

Volume of inventory & carrying cost.

EOQ can be determined by an approach.

The order-formula approach:-

There are number of mathematical formula to calculate EOQ. The most frequently used formula is

Q = EOQ.

U = Quantity purchased in a year/month.

P = Cost of placing an order. (ordering cost)

S = Annual/ monthly cost of storage of one unit known (carrying cost)

Trial & Error Approach:-

Carrying & ordering cost should be studied “order formula approach”.

Graphic Approach:

EOQ can found by drawing a graph.

ABC Analysis:-

A – Items with highest value.

B – Items with relatively low value.

C – Items with least valuable.

A – items maintain bare minimum necessary level of inventories.

B – items will be kept under reasonable control.

C – items would be under simple control.

FSN – Fast moving, Slow moving, Non-moving.

Fast moving in order of have smooth production.High demand – adequate inventory of these items maintained

Slow moving items:-Slowly moving indicated by a low turnover ratio needed to maintain at minimum level.

Dormant/obsolete items have no demand these should be disposed of a early as possible to curb further losses caused by them.

Inventory turnover Ratio:

=Cost of goods consumed or sold during year/ Average inventory during the year x 100