American Grain Corporation: When shareholders are about to invest in project, they need to know what the financial consequences of it are. They need to plan the expenses and the possibilities of return on investment, regarding how long it will take to start earning a profit. To choose the project which corresponds to their expectations, shareholders use a method named "capital budgeting". This method is defined by criteria. These criteria could be very different depending on what the shareholders' expectations are. Do they expect short term return on investment or is their plan focused on a long-term basis? The criteria could thus be diverse and would have to be specifically defined. The capital budgeting method takes into account all the possible expenditures. These include the cash outflow as investments in property, plant, equipment, research and development, and advertising campaigning, which are part of the strategy and help to have future inflow. A number of methods are used in capital budgeting.
[...] Can you remove slow movers from your product range without compromising best sellers? To implement a very efficient inventory management, managers have to review the effectiveness of existing purchasing and inventory systems; know the stock turn for all major items of inventory; apply tight controls to the significant few items and simplify controls for the trivial many; they have to sell off outdated or slow moving merchandise because it gets more difficult to sell the longer the company keeps it; they have to consider having part of the company's products outsourced to another manufacturer rather than make them itself; review the company's security procedures to ensure that no stock is stolen. [...]
[...] Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old. The longer someone owes a company, the greater chance to never get paid. If the average time of the debtors is getting longer, the company's managers have to wonder the following points: weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction. [...]
[...] The purchasing department, of any purchase position in the company initiates cash outflow and could create liquidity problems if not managed carefully. To organize this function in an efficient way, the company has to wonder: Who authorizes purchasing? - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Does the purchaser use order quantities which take account of stock-holding and purchasing costs? Does he know the cost of the company of carrying stock? [...]
[...] For example, project A has an expected lifetime of 7 years and project B of 11 years. To compare the NPV of each project is not a good method whereas it's possible to compare both of them by the annuity method. The equivalent annual cost method implies that the project will be replaced by an identical one. Identical projects means that there is an assumption of zero inflation; a real interest rate rather than a nominal interest rate is commonly used in the calculations Working Capital Cycle The working capital cycle is defined by the moving flow of capital: into, around and out of the business. [...]
[...] In the same way, to pay cash for fixed assets when available is not that a good idea. To pay cash means that the spent amount for fixed assets is no longer available for working capital. Moreover, if the cash is tight, it's better to study other ways of financing capital investment like loans, equity, leasing etc. Similarly, if the company pays dividends or increases drawings, these are cash outflows and they move liquidity from the business. There exist sources to add funds to your working capital; these sources include the following ones: Existing cash reserves Profits (when the company's secures it as cash) Payables (credit from suppliers) New equities or loans from shareholders Bank overdrafts or lines of credit Long-term loans The company could over-stretch the financial resources of the business which endanger it. [...]
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