Raw Material Such That Raw Material Comes †Myassignmenthelp.Com

Question: Discuss About The Raw Material Such That Raw Material Comes? Answer: Introduction Cash is one of the most important and critical resource in managing a business. It has been rightly said that cash is the KING as without it no business requirements can be sustained. This is one of the major component of the working capital and gives liquidity to the company. However, there should be a planning as to maintain only the required minimum amount of cash in hand such that the resource is not wasted and its alternative use or opportunity cost can be utilised. (Raiborn, Butler, Martin, 2016) Another important factor is the cycle within within which the cash is rolled back to the company when the company invests it in the form of raw material such that raw material comes, it is converted into finished goods, it is kept in the stock and then sold to the customer then the customer is given some credit terms and he/she pays back within such timelines, similarly the vendor or the supplier is also paid in some time based on the credit terms availed from him/her. Based on all th is, there is a timeline post which the cash once invested is returned or rolled back in the form of cash again. This is called cash operating or cash conversion cycle. The lower it is, the better it is for the business as it reflects liquidity and mobility of the cas Concepts on the cash flow management Here we will be discussing on 4 major components of cash management mentioned belew: Inventory management system: It forms part of the working capital and optimum inventory needs to be maintained in order to avoid the storage and pilferage costs. It may depends upon company to company and industry to industry as per the customer needs. For example, the food retailers and restaurants would have less inventory as compared to the apparels or construction industry(Knechel Salterio, 2016). The inventory management techniques include Just in time approach, the Kaizen approach, the vendor management approach where either the ordering is done based on the needs or the orders from the customer such that there is least time lag and least storage costs or the vendor himself looks into the stocks maintained by the company and replenishes them once the stock is low. Earlier the companies used to follow the approach called EOQ or economic order quantity where minimum possible quantity of stock was ordered based on the demand. This entails huge costs so the business managers shoul d look to economise it through effective and efficient planning. Ageing Analysis of the receivables and Bad debt: A continuous tarcking of the receivables ageing should be in focus in order to avaoid the bad debts and providing the management with the early warning signals in case there is any challenge in collection of the receivables. This helps to understand which of the debtors are faultering the credit timelines and where the discount could be given to the debtors based on the quick cash collection. It also helps to plan well if any of the debtors is experiencing a financial distress and may be bankruptcy by taking a provision for doubtful debts in the books. This also helps to analyse what are the customers who need to be continuously tracked and who are the healthy customers with which the business can be increased. (Fay Negangard, 2017) It also gives the fair idea of the DSO and what is the amount of working capital requirement in terms of the debtors standing in the balance sheet. Bad debts needs to be avoided on priority and the ageing schedule is the key to it as debtors can also be discounted or factoring can be done in case of immediate requirement of the cash to the company. The cost of foregoing the discount on the payables: This is one of the essential component and remains being unutilized by most of the companies because of the lack of analytical thinking. A lot of vendors offer discount in case the payment is made immediately or within the fixed timeline. Example vendor offering 1% discount in case the payment is made within 10 days, credit period being 30 days in total. In case the purchases are made for $1000000, the payment to be made comes to $ 990000 after availing discount and paying in advance by 20 days (30-10 days). On this basis, the annualised interest rate on loan comes out to (10000/990000)*(365/20) = 18.43%, i.e., the company is charging 18.43% p.a. in case the payment is made in regular 30 days. Now suppose, there is a aloan available in the market at 5-10%. The business should always avail the loan and try to make the payment to the vendor within 10 days to make use of the opportunity cost. This not only enhances the cash cycle of th e company but increases the turnover over the cash.(Jones, 2017) Working capital management ratios and cycle: The gap between the period when the cash is invested to buy inventory to the period when it is converted to cash again is termed as working capital cycle. It entails conversion of cash to inventory to finished goods to sales to debtors to cash again with payment to creditors. The shorter the cycle, the better it is. Different industries have different working capital gap such that companies which receive amount in advance of quick upon delivery like Pizza hut or Indigo airways have shorter cash conversion cycle whereas those like construction and transportation industry where the payment is on achievement of the milestone have longer cash cycles. It also depends on the credit terms offered by the vendors and how the relationship is being maintained with them.(Sonu, Ahn, Choi, 2017). Conclusion We can clearly see that the cash being a liquid asset is the most important resource of the company and there can be various measures and ways in which it can be managed well. Instead of outside funding sources, if the internal controls are well managed the cash requirement can be met within the business itself by churning it in the best possible manner. Also, care has to be taken such that extra inventory is not piled up and funds are not blocked in inventory, further the receivables are collected on time and good business relationships should be built with the suppliers in order to get the elongated credit period.(Grenier, 2017). Refrences Fay, R., Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, 38, 37-49. Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), 241-256. Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge. Knechel, W., Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge. Raiborn, C., Butler, J., Martin, K. (2016). The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21. Sonu, C., Ahn, H., Choi, A. (2017). Audit fee pressure and audit risk: evidence from the financial crisis of 2008. Asia-Pacific Journal of Accounting Economics , 24(1-2), 127-144.