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Managing Current Assets Example

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					           WHITE CELLS ARE ADJUSTABLE
                                                                                                                                                                                           © Kristoffer Burnett - Certified Management Accountant, 2009-2011
                                                                                                                                                                                                 Small business solutions at http://www.imperoco.com
         Managing Current Assets Example

                  INPUT

                           Cash

Cost per investment transaction               $        100 This is the cost incurred on every purchase or sale of an investment. Examples include, broker commissions, employee effort, and resource use
Total cash needed for the next year           $ 14,805,695 This is the forecast of all cash expenditures anticipated for the year
Expected annual return on investments                5.44%

                         Inventory

Item for economic order quantity (EOQ)            DM1         This can be either a direct material or a finished good.
Cost per purchase order/setup for DM1         $     2,822     These are the fixed costs incurred with every purchase order/setup. Examples include shipping, purchasing department expenses, and customs fees
Annual demand for DM1                             124,245     This is the amount needed (or forecasted) for production or sale
Annual carrying cost per unit of DM1          $   1.02060     These are the per unit variable costs associated with the holding of this item. Examples include the cost of capital, storage, and obsolescence


                 OUTPUT                             1


                           Cash

Optimal cash balance                          $    233,308

                         Inventory

EOQ for DM1                                         26,212



Notes:

1 Due to the subjective nature of the inputs for these calculations, it might be in the organization's best interest to be conservative and to use this information
  merely as a guideline. Care should be taken to ensure that there are no shortages of cash or inventory.
                   WHITE CELLS ARE ADJUSTABLE
                                                                                                                                                                                   © Kristoffer Burnett - Certified Management Accountant, 2009-2011
                                                                                                                                                                                         Small business solutions at http://www.imperoco.com
               Managing Current Assets Example

                            INPUT

                            Accounts Payable

Vendor name                                                  Vendor1
Total payment period for Vendor1 (in days)                         30 The number of days within which payment is due, after which a late fee would typically be assessed
Discount days for Vendor1                                          10 The number of days within which a discount could be realized if payment is made
Discount % for Vendor1                                          2.00% The amount of the discount for early payment

                           Accounts Receivable

Factor fee                                                      2.00%    This is the amount of the receivables that the factor will not pay back
Factor interest rate on monies advanced                        18.00%    This is the interest rate the factor will charge on receivables outstanding
Average monthly sales                                       $ 100,000    This amount is the average monthly receivables that could be sold to a factor
Amount of reserve                                              10.00%    A factor will typically hold a certain amount back (reserve) to cover potential bad debts
Credit terms (in days)                                              60   This is the number of days within which customers have to pay the factor


                           OUTPUT

                            Accounts Payable

Annual cost of not taking discount from Vendor1                44.59% This is the compounded annual interest rate accrued due to holding cash the days between the discount period and the payment period

                           Accounts Receivable

Amount to be received from the factor immediately           $ 85,396 This is the amount of cash received immediately upon transfer of receivables to the factor
Monthly cost of using a factor assuming return of reserve   $ 4,604 This equals the amount of receivables foregone due to factoring. This number can be compared to the cost of handling AR within the organization
                                                         © Kristoffer Burnett, 2010
                                                           Small biz solutions at www.imperoco.com
Managing Current Assets Example

                             INPUT

                         Accounts Payable
Vendor name                                              Vendor1

Total payment period for Vendor1 (in days)                     30 The number of days within which payment is due, after which a late fee would typically be assessed

Discount days for Vendor1                                      10 The number of days within which a discount could be realized if payment is made

Discount % for Vendor1                                      2.00% The amount of the discount for early payment

                    Accounts Receivable
Factor fee                                                  2.00% This is the amount of the receivables that the factor will not pay back

Factor interest rate on monies advanced                    18.00% This is the interest rate the factor will charge on receivables outstanding

Average monthly sales                                   $ 100,000 This amount is the average monthly receivables that could be sold to a factor

Amount of reserve                                          10.00% A factor will typically hold a certain amount back (reserve) to cover potential bad debts

Credit terms (in days)                                          60 This is the number of days within which customers have to pay the factor


                            OUTPUT

                      Accounts Payable
Annual cost of not taking discount from Vendor1            43.86% This is the compounded annual interest rate accrued due to holding cash the days between the discount period and the payment period

                     Accounts Receivable
Amount to be received from the factor immediately       $ 85,360 This is the amount of cash received immediately upon transfer of receivables to the factor
Total cost of using factor assuming return of reserve   $ 4,640 This equals the amount of receivables foregone due to factoring. This number can be compared to the cost of handling AR within the organization

				
DOCUMENT INFO
Description: The managing of current assets first and foremost is concerned with the ongoing solvency of the organization. Beyond simply ensuring that the company can meet its current liabilities, steps should be taken to ensure that each category of current assets is being managed as optimally as possible.
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