Analisis Laporan Keuangan

Analisis Working Capital

Net Working Capital

Working Capital includes a firms current assets, which consist of cash and marketable securities in addition to accounts receivable and inventories. It also consists of current liabilities, including accounts payable (trade credit), notes payable (bank loans), and accrued liabilities. Net Working Capital is defined as total current assets less total current liabilities.

The Tradeoff Between Profitability & Risk

The Cash Conversion Cycle

Short-term financial managementmanaging current assets and current liabilitiesis on of the financial managers most important and time-consuming activities. The goal of short-term financial management is to manage each of the firms current assets and liabilities to achieve a balance between profitability and risk that contributes positively to overall firm value.

Central to short-term financial management is an understanding of the firms cash conversion cycle.

Calculating the Cash Conversion Cycle

The Operating Cycle (OC) is the time between ordering materials and collecting cash from receivables. The Cash Conversion Cycle (CCC) is the time between when a firm pays its suppliers (payables) for inventory and collecting cash from the sale of the finished product.

Calculating the Cash Conversion Cycle (cont.)

Both the OC and CCC may be computed as shown below.

Calculating the Cash Conversion Cycle (cont.)

MAX Company, a producer of paper dinnerware, has annual sales of $10 million, cost of goods sold of 75% of sales, and purchases that are 65% of cost of goods sold. MAX has an average age of inventory (AAI) of 60 days, an average collection period (ACP) of 40 days, and an average payment period (APP) of 35 days. Using the values for these variables, the cash conversion cycle for MAX is 65 days (60 + 40 - 35) and is shown on a time line in Figure 14.1.

Calculating the Cash Conversion Cycle (cont.)

Calculating the Cash Conversion Cycle (cont.)

The resources MAX has invested in the cash conversion cycle assuming a 365-day year are:

Obviously, reducing AAI or ACP or lengthening APP will reduce the cash conversion cycle, thus reducing the amount of resources the firm must commit to support operations.

Strategies for Managing the CCC

1. Turn over inventory as quickly as possible without stock outs that result in lost sales. 2. Collect accounts receivable as quickly as possible without losing sales from high-pressure collection techniques. 3. Manage, mail, processing, and clearing time to reduce them when collecting from customers and to increase them when paying suppliers. 4. Pay accounts payable as slowly as possible without damaging the firms credit rating.

Inventory Management: Inventory Fundamentals

Classification of inventories:
Raw materials: items purchased for use in the manufacture of a finished product
Work-in-progress: all items that are currently in production Finished goods: items that have been produced but not yet sold

Inventory Management: Differing Views About Inventory

The different departments within a firm (finance, production, marketing, etc.) often have differing views about what is an appropriate level of inventory. Financial managers would like to keep inventory levels low to ensure that funds are wisely invested. Marketing managers would like to keep inventory levels high to ensure orders could be quickly filled. Manufacturing managers would like to keep raw materials levels high to avoid production delays and to make larger, more economical production runs.

Techniques for Managing Inventory

The ABC System
The ABC system of inventory management divides inventory into three groups of descending order of importance based on the dollar amount invested in each. A typical system would contain, group A would consist of 20% of the items worth 80% of the total dollar value; group B would consist of the next largest investment, and so on. Control of the A items would intensive because of the high dollar investment involved.

Techniques for Managing Inventory (cont.)

The Economic Order Quantity (EOQ) Model

Where:
S O C Q = = = = usage in units per period (year) order cost per order carrying costs per unit per period (year) order quantity in units

Techniques for Managing Inventory (cont.)

The Economic Order Quantity (EOQ) Model Assume that RLB, Inc., a manufacturer of electronic test equipment, uses 1,600 units of an item annually. Its order cost is $50 per order, and the carrying cost is $1 per unit per year. Substituting into the above equation we get:

 The EOQ can be used to evaluate the total cost of inventory as shown on the following:
Ordering Costs = Cost/Order x # of Orders/Year Ordering Costs = $50 x 4 = $200 Carrying Costs = Carrying Costs/Year x Order Size 2 Carrying Costs = ($1 x 400)/2 = $200

Techniques for Managing Inventory (cont.)

Total Costs = Ordering Costs + Carrying Costs

Total Costs = $200 + $200 = $400

Techniques for Managing Inventory (cont.)

The Reorder Point
Once a company has calculated its EOQ, it must determine when it should place its orders. More specifically, the reorder point must consider the lead time needed to place and receive orders. If we assume that inventory is used at a constant rate throughout the year (no seasonality), the reorder point can be determined by using the following equation:

Reorder point = lead time in days x daily usage

Daily usage = Annual usage/360

Techniques for Managing Inventory (cont.)

The Reorder Point Using the RIB example above, if they know that it requires 10 days to place and receive an order, and the annual usage is 1,600 units per year, the reorder point can determined as follows: Daily usage = 1,600 units : 360 days = 4.44 units/days Reorder point = 10 x 4.44 units/days = 44.44 or 45 units

Techniques for Managing Inventory (cont.)

Thus, when RIBs inventory level reaches 45 units, it should place an order for 400 units. However, if RIB wishes to maintain safety stock to protect against stock outs, they would order before inventory reached 45 units.

Techniques for Managing Inventory (cont.)

Just-In-Time (JIT) System
The JIT inventory management system minimizes the inventory investment by having material inputs arrive exactly at the time they are needed for production. For a JIT system to work, extensive coordination must exist between the firm, its suppliers, and shipping companies to ensure that material inputs arrive on time.
In addition, the inputs must be of near perfect quality and consistency given the absence of safety stock.

Techniques for Managing Inventory (cont.)

Computerized Systems for Resource Control
MRP systems are used to determine what to order, when to order, and what priorities to assign to ordering materials. MRP uses EOQ concepts to determine how much to order using computer software. It simulates each products bill of materials structure all of the products parts), inventory status, and manufacturing process.

Techniques for Managing Inventory (cont.)

Computerized Systems for Resource Control
Like the simple EOQ, the objective of MRP systems is to minimize a companys overall investment in inventory without impairing production.
Manufacturing resource planning II (MRP II) is an extension of MRP that integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system. This system generates production plans as well as numerous financial and management reports.

Techniques for Managing Inventory (cont.)

Computerized Systems for Resource Control
Unlike MRP and MRP II, which tend to focus on internal operations, enterprise resource planning (ERP) systems can expand the focus externally to include information about suppliers and customers.
ERP electronically integrates all of a firms departments so that, for example, production can call up sales information and immediately know how much must be produced to fill certain customer orders.

Accounts Receivable Management

The second component of the cash conversion cycle is the average collection period the average length of time from a sale on credit until the payment becomes usable funds to the firm.

The collection period consists of two parts:

the time period from the sale until the customer mails payment, and the time from when the payment is mailed until the firm collects funds in its bank account.

Accounts Receivable Management: The Five Cs of Credit

Character: The applicants record of meeting past obligations. Capacity: The applicants ability to repay the requested credit. Capital: The applicants debt relative to equity. Collateral: The amount of assets the applicant has available for use in securing the credit. Conditions: Current general and industryspecific economic conditions.

Accounts Receivable Management: Credit Scoring

Credit scoring is a procedure resulting in a score that measures an applicants overall credit strength, derived as a weighted-average of scores of various credit characteristics.

The procedure results in a score that measures the applicants overall credit strength, and the score is used to make the accept/reject decision for granting the applicant credit.

Accounts Receivable Management: Changing Credit Standards

The firm sometimes will contemplate changing its credit standards to improve its returns and generate greater value for its owners.

 Dodd Tool, a manufacturer of athlete tools, is currently selling a product for $10/unit. Sales (all on credit) for last year were 60,000 units. The variable cost per unit is $6. The firms total fixed costs are $120,000. Dodd is currently contemplating a relaxation of credit standards that is anticipated to increase sales 5% to 63,000 units. It is also anticipated that the ACP will increase from 30 to 45 days, and that bad debt expenses will increase from 1% of sales to 2% of sales. The opportunity cost of tying funds up in receivables is 15%. Given this information, should Dodd relax its credit standards?

Changing Credit Standards Example

Changing Credit Standards Example (cont.)

Dodd Tool Company Analysis of Relaxing Credit Standards Relevant Data Present Sales Level (units) Proposed Sales Level (units) Price/unit ($) Variable Cost/unit ($) Contributin Margin/unit ($) Old Receivables Level (days) New Receivables Level (days) Present A/R Turnover (365/AR) Proposed A/R Turnover (365/AR) Present Bad Debt Level (% of sales) Proposed Bad Debt Level (% of sales) Opportunity Cost (%) $ $ $ 60,000 63,000 10.00 6.00 4.00 30.0 45.0 12.2 8.1 1.0% 2.0% 15.0%

Changing Credit Standards Example (cont.)

Additional Profit Contribution from Sales
Dodd Tool Company Analysis of Rexaxing Credit Standards Additional Profit Contribution from Sales Old Sales Level New Sales Level Increase in Sales 60,000 Price/Unit 63,000 Variable Cost/Unit 3,000 Contribution Margin/Unit (sales incr x cont margin) $ 10.00 $ $ 6.00 4.00

Additional Profit Contribution from Sales

$ 12,000

Changing Credit Standards Example (cont.)

Dodd Tool Company Analysis of Rexaxing Credit Standards Cost of Marginal Investment in Accounts Receivable Cost of Marginal Investment in A/R = Total VC/Turnover of A/R Total VC = VC/Unit X # of Units Total VC Under the Present Plan Total VC Under the Proposed Plan Average Investment Under Present Plan Average Investment Under Proposed Plan Marginal Investment in Accounts Receivable Opportunity Cost Cost of Marginal Investment in Accounts Receivable $ $ $ $ $ $ 360,000 378,000 29,508 46,667 17,158 15.0% 2,574

Changing Credit Standards Example (cont.)

Dodd Tool Company Analysis of Relaxing Credit Standards Cost of Marginal Bad Debt Cost of Bad Debt = Bad Debt % x Total Sales Total Sales under Present Plan Total Sales under Proposed Plan Bad Debt % under Present Plan Bad Debt % under Proposed Plan Cost of Bad Debt under Present Plan Cost of Bad Debt under Proposed Plan Cost of Marginal Bad Debts $ $ $ $ $ 600,000 630,000 1.0% 2.0% 6,000 12,600 6,600

Changing Credit Standards Example (cont.)

Dodd Tool Company Analysis of Relaxing Credit Standards Making the Credit Standard Decision Additional Profit Contribution from Sales Cost of Marginal Investment in Accounts Receivable Cost of Marginal Bad Debts Net Profit From Implementation of Proposed Plan $ $ 12,000 (2,574) (6,600) 2,826

Changing Credit Terms

A firms credit terms specify the repayment terms required of all of its credit customers. Credit terms are composed of three parts:
The cash discount The cash discount period The credit period

For example, with credit terms of 2/10 net 30, the discount is 2%, the discount period is 10 days, and the credit period is 30 days.

Changing Credit Terms Example

MAX Company has an average collection period of 40 days (turnover = 365/40 = 9.1). In accordance with the firms credit terms of net 30, this period is divided into 32 days until the customers place their payments in the mail (not everyone pays within 30 days) and 8 days to receive, process, and collect payments once they are mailed. MAX is considering initiating a cash discount by changing its credit terms from net 30 to 2/10 net 30. The firm expects this change to reduce the amount of time until the payments are placed in the mail, resulting in an average collection period of 25 days (turnover = 365/25 = 14.6).

Changing Credit Terms Example (cont.)

Credit Monitoring
Credit monitoring is the ongoing review of a firms accounts receivable to determine whether customers are paying according to the stated credit terms. Slow payments are costly to a firm because they lengthen the average collection period and increase the firms investment in accounts receivable. Two frequently used techniques for credit monitoring are the average collection period and aging of accounts receivable.

Credit Monitoring: Average Collection Period

The average collection period is the average number of days that credit sales are outstanding and has two parts:
The time from sale until the customer places the payment in the mail, and The time to receive, process, and collect payment.

Credit Monitoring: Aging of Accounts Receivable

Credit Monitoring: Collection Policy

The firms collection policy is its procedures for collecting a firms accounts receivable when they are due. The effectiveness of this policy can be partly evaluated by evaluating at the level of bad expenses. As seen in the previous examples, this level depends not only on collection policy but also on the firms credit policy.

Collection Policy