Tuesday, March 22, 2011

Corp.finance 3: Working capital Management (3) - Inventory

MANAGING INVENTORY
  • Aim: keep production continuous however, NO more inventory than necessary
  • Motive for holding inventory
    • Transaction motive
      • inventory is needed as a part of the routine production-sale cycle <=> equals to planned manufacturing
      • dictated by the manufacturing plan
    • Precautionary stock
      • avoid  any stock-out losses <=> profit lost from not having sufficient inventory on hand to satisfy demand (NOT enough inventory)
    • Speculative motive, for example
      • ensuring the availability & pricing of inventory
  • Results of inappropriate inventory reserved
    • Over reserved
      • liquidity squeezes
      • misuse of facility
      • reduce firm's competitiveness: can't match pricing 'cos of its large inventory costs
    • Under reserved
      • losing customers (stock-out losses), gain their ill-will from long delays delivery (?)
      • plant shut down & expensive special runs
      • inability to avoid price increases by suppliers
  • Approach to managing levels of inventory
    • EOQ (economic operating quantity)
      • safety stock: @ Q that needs to order new inventory
      • anticipation stock: Q> Q that needs to order new inventory
    • JIT (just in time), combined with Manufacturing Resources Planning (MRP)
  • Inventory cost
    • ordering
    • carrying
    • stock-out
    • policy
  • Evaluating inventory management
    • No. of days of inventory
    • Inventory turnover

Corp.finance 3: Working capital Management (2) - A/R

MANAGING A/R (account of receivables)
  • A/R features
    • important, 'cos:
      • lead to customers' default (more popular), or
      • lead to decrease sales
    • a go-between for credit manager, treasury manager & accounting manager => need to combine the operating
    • considered to be a derivative activity from credit granting
    • goals of managing AR:
      • update
      • accurate
      • exactly appropriate btw the 3 department
    • How to do managing:
      • inside: by captive finance subsidiary: established to provide financing of the sales of the parent firm
      • outside: outsourcing service
  • Key element of trade credit granting process
    • Types of credit accounts
      •  Ordinary terms: standard format
        •  Net t: pay fully @ t days after today
        • d/t1 net t: discounted d% if pay in t1 days from now, or full @ t days after today
      • CBD: cash before delivery
      • COD: cash ON delivery
      • Bill-to-bill: pay for Nth bill before (N+1)th bill
      • Monthly billing: pay monthly
    • Credit scoring model
  • Managing customers' receipts (not yet understood)
  • Evaluating AR management
    • AR turnover, no. of days of AR: rough data, tell nothing 'bout quality of AR
    • weighted average collection period
      • separate AR in different groups, for example: 1-30days, 31-60days...
      • compute % of each group in total AR (*), eg.: 20/100 = 20%
      • weighted days: multiply (*) by average day in each aging group, for example: average day of aging group "1-30 days" is 28 days => 20% * 28days = 5.6 weighted days
      • sum all the weighted days => weighted average collection period