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Dear sir,
If the examiner asks for criteria to increase profitability (by managing WC), then I will mention the below list:
1. For inventory, Keep minimum cash
2. For inventory, Keep sufficient inventory to meet the demand of the market
3. For A/R, Allow credit so that customers be happy
4. For A/P, Delay the payments reasonably to use the free financingI am confused that what is the criteria to increase profitability. What are the factors to be considered. What actions should I take to increase profitability.
I think if I go opposite to profitability, then I will increase my liquidity for the above 4 points.
You comment needed. Thanks.
For inventory, keep minimum cash is meaningless.
They should keep the minimum inventory they can while still being able to meet demand.
For receivables, they should collect receivables as quickly as possible without risking losing sales to competitors who give longer periods of credit,
For payables they should delay payment as long as possible provided the suppliers do not then refuse to supply.
All of this is dealt with in my free lectures. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Sorry my mistake,
I meant for Cash, we should keep minimum cash to pay just current liabilities. Some of the cash should be invested in securities, which can be sold anytime on stock exchange when we need cash.
The remaining cash should be invested in fixed assets etc.
Please comment if you do not agree with the above plan to increase profitability.
Dear sir,
For liquidity, we should try to keep as much liquid assets as possible:
1. For inventory, we should keep sufficient inventory to meet the demand.
2. For receivables, we should try to collect receivables ASAP.
3. For payables, we should pay ASAP
4. For cash, we should keep sufficient cash to pay for current liabilities. The extra cash should be invested in securities and fixed assets.But these are almost the same objectives that we were considering for profitability. Only receivables and payables are different, where we do not consider any discount or suppliers refusal to supply.
Please comment whether I am going in the right direction to conclude the liquidity and profitability objectives of WC mngt.
P.S.: Thank you for the lectures, I even watched the revision lectures of WC. But still have to clear my concept.
Firstly, I don’t agree with your first line.
We don’t want to keep as much liquid assets ‘as possible’ – just sufficient to make sure we can continue to pay our liabilities. Any extra is better invested in non-current assets because it is them that earn the profits.Also, I think you maybe mistyped your point 3 – we should take as much credit as possible from payables (provided the suppliers will continue to supply)
Otherwise you are in the right direction. But remember the main thing that affects profitability is the investment in non-current assets, which is not directly related to liquidity.
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