Question

Increasing net operating asset turnover requires some combination of increasing sales and/or decreasing net operating assets. For the latter, many companies consider ways to reduce their investment in working capital (current assets less current liabilities). This can be accomplished by reducing the level of accounts receivable and inventories, or by increasing the level of accounts payable. Required a. Develop a list of suggested actions that you, as a manager, could undertake to achieve these three objectives. b. Describe the marketing implications of reducing receivables and inventories, and the supplier implications of delaying payment. How can a company reduce working capital without negatively impacting its performance?

Answer 1

Answer for (a).

• Profit can be increased by sales or decrease in cost. these two sales and cost affect the profit.
• Some times credit sales takes place it involves interest cost and reduces profit.
• Carrying costs also occured if more inventory holds it leads to lower profits.
• Some ways to made higher profits: made more cash sales
• Maintain sufficient inventory to meet normal demand.
• Maintain long term contracts with buyers to proper anticipation of demand.
• Cash discounts for early payments.
• Implement best costing techniques like JIT, TQM

Answer for (b).

• Increase in credit sales leads to higher accounts receivables.
• In the same way many companies maintain higher inventory to meet unexpected demand and stock outs.
• It is very unrealistic to operate on cash-and -carry only.
• May be the organization should have some arrangement with the banks to get the biils discounted/factored so that the money comes back for reinvestment.
• At the same time companies have proper manpower to collect credit sales amount.
• In the same way carry inventory sufficient to meet demand to avoid carrying costs.