Financial Management Case Essay Example | Topics and Well Written Essays - 2500 words

Financial Management Case - Essay Example These assets and liabilities are to be cashed or spent in the ordinary course of business; that is, we do not have to liquidate our company just to raise the cash we need, and neither do we have to pay all our long-term debts now. Working capital basically is a measure of how we manage our collections and our costs. Good working capital management, by lowering costs and maximising collections, contributes to maximising shareholder value, which is one of the Board's primary duties. An analysis of our current practices in this aspect of financial management has revealed the following problems: Trade receivables have increased from the desired thirty days to the actual fifty days. Bad debts have reached 1.5 percent of total sales. We are spending 76,000 annually, equivalent to 3.2 percent of sales, for trade debt or receivables financing, bad debts, and overhead. We have studied two options to manage our working capital that can bring down our costs and bring up our collections. Summary Course of Action We have looked at two options: Factoring (Option A) and Discounting (Option B). We summarise our findings as follows: Comparison of two options and current system Current system Trade debts from collections 40,000 Bad debts 36,000 Annual cost of debts: 76,000 Option A: Factoring Trade debts from collections 22,000 Service charges 48,000 Savings on bad debts (36,000) Savings from factoring (18,000) Annual cost of debts: 16,000 Annual savings from Option A: 60,000 Option B: Discounting Trade debt savings 6,400 Savings from collected bad debts 12,000 Cost of discounts (9,600) Annual savings from Option B: 8,800 Total savings from Options A and B: 56,800 We have calculated that factoring will save us 60,000...This is called working capital management. Working capital is the cash that is readily available to the organisation. This can be derived from the corporation's balance sheet by subtracting our current liabilities (short-term organisational commitments that needs cash payments) from our current assets (company resources that can be converted into cash in the short-term). These assets and liabilities are to be cashed or spent in the ordinary course of business; that is, we do not have to liquidate our company just to raise the cash we need, and neither do we have to pay all our long-term debts now. Working capital basically is a measure of how we manage our collections and our costs. Good working capital management, by lowering costs and maximising collections, contributes to maximising shareholder value, which is one of the Board's primary duties. We have calculated that factoring will save us 60,000 annually. Discounts will save us an additional 8,800 by bringing down our bad debts and trade debts costs, even if these discounts will cost us initially 9,600. If we use both options, we can save 56,800 each year, equivalent to 2.4 percent of sales. Note that combining the two options will give us a lower figure for total savings because if we use the Discounting option together with Factoring, the elimination of bad debts from availing of the latter (Factoring) option will give us only the benefit of trade debt savi