Financial Management: Impacts on operating cycle and cash conversation cycle
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This report discusses the impacts on the operating cycle and cash conversation cycle due to an increase in the payment period in financial management. It also covers topics such as average collection period, payback period, NPV, weighted average cost of capital, and capital budgeting methodologies.
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Financial Management
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Contents INTRODUCTION.......................................................................................................................................3 MAIN BODY..............................................................................................................................................3 1. Impacts on operating cycle and cash conversation cycle due to increase in the payment period.........3 2. Cash and accounting break even points...............................................................................................4 3. Calculate of weighted average cost of capital......................................................................................5 4. Capital budgeting methodologies........................................................................................................6 5. Reason behind the decision................................................................................................................10 6. Discuss the limitation of the above analysis......................................................................................11 CONCLUSION.........................................................................................................................................12 REFERENCES..........................................................................................................................................13
INTRODUCTION Financial management concentrates on long-term success, as compared to "tactical" managerial decisions that contribute to short-term placement. When a corporation is strategic rather than positional, it just helps make financial choices predicated on what it likes to think will also inevitably produce things that is in the long term, which indicates that a business often has toacceptfailuresinthecurrentsituation,inordertoaccomplishtheseotheroutcomes (Bartolacci, Quaranta and Soverchia, 2018). Financial management also visually impaired and maintaining appropriate, assigning and receiving the assets and liabilities in the balance sheet, while tracking functional finance products such as investment, sales, receivable and accounts payable records, working capital and profitability. This report has been based on the Dura bike which is manufacturing company and set up in New York and due to Covid 19 faces various problems in regard of revenues. This report involves various topics such as, average collection period, payback period, NPV, weight age average cost of capital, treasury bonds and many others. MAIN BODY 1. Impacts on operating cycle and cash conversation cycle due to increase in the payment period The average collection period is the amount of days from the day a payment contract is made until the day the customer receives for that transaction. The average collection time of a company is reflective of the usefulness of the deferred revenue working strategiesin its transactions. Companies need to be able to maintain their average collection time to make sure proper functioning. In general, a lower average collection time is much more important than having account receivable duration. The operating cycle is the average time needed for an industry to create an original amount of funds in order to deliver a product, deliver the stock and obtain money from clientsin termsfor a product. This is important to estimate the level of working capital a firm would requireto preserve or expand the business. When payment period increase so it impact on the operating cycle in negative manner and longer payment terms shorten the operating cycle due to organisation can delay paying out the cash.
The cash conversion cycle (CCC) indicates how effectively a firm can turn cash available into further money on hand. This is achieved by the CCC accompanying the cash when it is first translated into inventory and accounts paid (AP), into revenue and account receivable (AR), but instead again into money. When payment period increase so it impact on the this cycle in negative manner because the company collect payment late that create problem of money and cycle remain back due to changes. The lower that number, the further productive it is for the company to demand money from its clients. Increased levels can mean a range of things, the much more common is that the clients don't pay their bills promptly. A high number, that being said, can also signify more massive issues or potentials that can adversely influence the economy (Constantinides, G.M., Czerwonko and Perrakis, 2020). A working capital loan is a loan which is taken to fund the daily business operations. These funds should not be used for purchasing lengthy-term assets or acquisitions that are used rather and provide the capital expenditure that meets the brief-term financial needs of a business. Dura bike can sell out about 100 bikes per day and recover from the average collection period requireincreasingworking capitalfinancinginproper mannerto changeaverage collection period. There is required to increase working finance about 250 per bike that helps to recover all the payments from market and payment to suppliers on particular time period. 2. Cash and accounting break even points A break-even analysis is an accounting instrument that enables users evaluates how cost effective their business, or a fresh products or services, would be at. In other phrases, it is an economicmeasurementtodeterminetheproductsorserviceabusinessmustadvertise (particularly fixed costs) to cover all the expenses. On the basis of forecasted 21900 bikes per year sale by the Dura bikes so it will help to business to carry out at the break event point. From the last 10 years the company follows the same strategies that impact on the operating cycle and cash conversation cycle in negative manner. To recover from the losses company starting to increase selling units and try to sell out more bikes on per day basis. Here is calculated break even point Selling price: 620 per unit Fixed cost = 300
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Breakeven point = Fixed cost/ Selling unit = 620/300 = 2.067 The working capital increase necessary to accommodate the proposal from the marketing team is given by 30 x 100 x 300, or $900,000. ·The cash breakeven point is given by ($5,600,000-$1,600,000)/$320, or 12,500 units. ·The accounting breakeven point is given by $5,600,000/$320, i.e., 17,500 units. As per the calculation it is getting that the business can come on the track after the analysis of breakeven point. When Dura bike increases selling units along with selling price so they will achieve corresponding cash in a year. They will recover all the losses in certain period of time. The accounting breakeven point is the total sales at which a company gets precisely zero profits, provided the same proportion of extra costs for which it is forced to pay for each time frame. This idea is often used to mold a firm's earnings framework(Choi, 2018). If a firm’s accounting initial investment and a money breakeven point for a company were developed, they will also probably announce slightly distinct breakeven points for purchases, as the duration of the acknowledgement of expenses is distinct underneath the 2 techniques. In particular, the financial reporting breakdown point would have been less probable to move around a lot than the cash breakdown point, as the cash accounting usually leads towards a more sustainable revenue acknowledgement 3. Calculate of weighted average cost of capital The weighted average capital cost (WACC) is an indicator of the company's capital expense, in which every investment type is expressed in proportion. A WACC method allocates all financing costs, including such common stock, preferred stock, investment funds and any other holding costs. A corporation's WACC is growing as the alpha and returning rate on capital employed while a WACC development suggests a reduction in exposure to hazard increase. V = E + D = 113 The equity linked with the cost of capital (E/V) * Re = 77.86 / 113 * 6.16 = 0.04
The debt component is (D/V) * Rd * (1 – Tc) = 36.83/113 * 6.61% * (1 - 20%) Using the above two computed figure, WACC for Dura bike can be calculated as: 0.0449 + 0.016 = 6.1% Cost of equity:2.5% + 1.4 x (8.5% - 2.5%) = 10.90%, the after-tax cost of debt ends up being 8% x (1-30%) = 5.6%. The weighted average cost of capital (WACC) is given by 20% x 5.6% + 80% x 10.90% = 9.84% The cost of equity is an implicit return on capital or a price of development. In principle, it is the level the return initial wealth to reimburse them for the money invested in the inventory. The Variance is a function of the excess return in a market relative to the entire economy. This can be determined by uploading statistical daily returns from Forbes and then using the constants WACC and BETA. The easiest aspect of the WACC equation is possibly calculating the expense of the loans and preferred stock. The debt cost is the rate of return to expiration on the loans of the company and likewise, the cost of preferred shares is the rate of return on the preferred company’s stock(Adams and et. al, 2019). Increase merely the deficit expense and produce on ordinary shares with the overall debt and preferred stock in the capital structure of the firm, in both. 4. Capital budgeting methodologies There are analyzed various types of methodologies to analysis of returns from the investment of particular project such as: Payback period: The Payback Period largely determines the amount of time needed to regain the program's original investment. Merely, this is the method for calculating the time needed by subsequent cash inflows to recoup the costs accrued in the investment funds. A payback method is the length of time it takes to recoup an investment manager expense. Benefits: Good indicator of asset allocation is the payback period. It is widespread used because money supply is a significant selection criteria for a project. Payback-period approach is
beneficial for limited infrastructure projects. In these kind of project activities it is not good to spend a great deal of time and money on complex financial evaluation. Calculation as accordance of investment appraisal techniques. (I) Payback period Initial investment16000,000 Cash flow2585600 Payback period6.19 years Net Present value: Net present value ( NPV) is the difference between most of the cash inflows over time and sales, and cash outflow. The NPV is used to determine the financial success or function of the industry with respect to returned on investment. A time value of money makes the output provided by a venture or investment in the current dollars exceeds the costs needed to pay (Devos, Elliott and Warr, 2018). An expense with a favorable NPV is expected to be advantageous, and a net loss would result from intervention with a harmful NPV. This concept forms the basis for the Net Present Value Act, what stipulates that only contracts with positive Net present values can be considered. Benefits: The obvious advantage of this concept-value approach is that it provides into consideration the core principle that currently compensation is valuable less than one dollar. The cash flows are estimated by yet another timeframe of return on capital in each timeframe. Years
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NPV= Discounted cash flow – initial investment Initial investment=16,000,000 Net Cash flowPV factor @ 12% Discounted cash flow Year 125856000.8922306355.2 Year 225856000.7972060723.2 Year 325856000.7111838361.6 Year 425856000.6351641856 Year 525856000.5671466035.2 Year 625856000.5061308313.6 Scarp Value412500.50620872 Discounted Cash Flow16002817.5 Net Present value (NPV)=16000000 – 16002817.5 =28817.5 Internal rate of return: Internal Return Rate (IRR) is the standard rate of depreciation used by managers to understand what capital assets or potential ventures would yield an adequate answer and be worth consideration. The IRR for a particular project is the rate equating the net expected cash flows currents from the proposal to nil. In other sentences, if we used the intake manifold as the rate of return to calculate the expected cash flows flow pattern from a complex product and removed the investment back, our net budget for the project would also be null (Rodríguez, Dandapani and Lawrence, 2019). Benefits: The benefits of the IRR approach would be that the process and definition are simple to follow and that the IRR takes the duration value of the currency into consideration to provide a
more precise estimate. The IRR also lets the investment company want a overview of the development's possible future financial returns. PV at 12%: PV at 20%:
NPV equals -$2 817.05, IRR will be equal to 9.836% which is smaller than 9.84%, similar to the conclusion by NPV criteria. Payback period is 6.19 years. 5. Reason behind the decision The company must focus on the treasury bonds in order to generate more profit because it helps to business to generate more earnings. During troubled times bonds were a viable substitute to stocks. Government bonds in general are accompanied by the U.S. government's creditworthiness, thus the definition possibility is almost non-existent. This tends to make Treasury bonds a stable location to spend allmoney. The bonds’ fair value is $1081.11 and the share valuation is $10.50. Treasury bonds (T-bonds) are national government-issued government debt financial instruments with maturity dates exceeding 10 years. T-bonds receive monthly return until completion, after which stage a par sum proportional to the interest is payable to the lender too (Markota Vukić, Vuković and Calace, 2018). Semi-annually, treasury securities receive a reasonable inflation rate. Treasury bonds are revenues due which have a term of 30 years. They receive interest before redemption and then when the Treasury bond develops, the shareholder is
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often paid a par sum, or the principal. Treasury bonds are part of the greater segment of U.S. public bonds known collectively as treasury bonds, normally considered nearly risk-free because they are accompanied by the willingness of the United States government to tax them. Bond yields (T-bonds) are one of 4 forms of borrowers report from the United States. Federal Reserve to underwrite the expenditure actions of the organisation. Treasury bills, Treasury bills, Treasury bonds and Treasury Inflation-Protected Bonds (TIPS) are the four forms of debt. The investment funds vary according to foresight and voucher payments. They are also regarded standards for their equivalent types of limited deposit, as they are practically risk-free, guaranteed by the U.S. government, that can use to enhance taxes and revenues to assure for the full payments. The reason behind the decision such as: These are beneficial for longer period of time. It supports to business and secure because these are based on government analysis. 6. Discuss the limitation of the above analysis These are mentioned some limitation of above analysis such as: Long-term investment: This U.S. bond may have to delay up to 30 years to maturity. Limitsandpenalties:Limitsandpunishmentsmaybecorrelatedwithrepaying government securities already when they reach maturity. Tax liability: The involvement is exempt from federal income tax althoughwould not pay government or county taxation on the interestbonds accumulate. Buying limits: Whenbuy their securities via a sale price, userscan only deductibles to 35 percent of the estimated deposit of the contract(Kisman and Krisandi, 2019). Low yield: Treasuries are a secure investment but they're not going to deliver exciting returns. The return on investment varies from one bond issue to another, and even if users retain a connection to longer maturities, the yield is close to zero. Securities which offer more risk than bond yields also give better returns. CONCLUSION As pr the above report it has been concluded that a business need to finance to conduct various activities in the business. For this require to financial management is essential for the
business that helps to manage different business activities in order to maintain various things. From the above analysis it is getting that different capital budgeting techniques can help take decision in regard of business investment. Along with analysis different benefits of various methodologies. Moreover, take the decision of investment for treasury bonds in order to generate more earnings.
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