Operating Cycle Analysis

Topics: Working capital, Inventory, Cash conversion cycle Pages: 17 (3235 words) Published: October 3, 2012
Keells Food Products PLC

Keells Food Products PLC is presently Sri Lanka’s market leader in the processed meat industry and enjoys a market share of approximately 70%. A subsidiary company of John Keells Holdings, KFP PLC started its operations in the year 1983, and today takes the pride being solely responsible in developing the Sri Lankan Processed Meats industry to its current heights. KFP PLC have kept abreast of the industry through strategic investments in state-of-the-art food processing technology, quality control systems, an aggressive company wide R&D orientation and ground breaking marketing leadership in the food industry of Sri Lanka. Their brands enjoy tremendous equity in the Sri Lankan market, thanks to the concerted efforts made to establish the core values of convenience and quality. Vision

Building businesses that are leaders in the region

“ The taste of goodness “

* Innovation - Changing constantly, re-inventing and evolving * Integrity - Doing the right things always
* Excellence - Constantly raising the bar
* Caring - Fostering a great place to work   
* Trust - Building strong relationships based on openness and trust

Operating Cycle / Working Capital Cycle
The length of operating cycle of a manufacturing firm is the sum of (i) inventory conversion period (ICP) and 
(ii) Debtors (Receivable) conversion period (DCP). 
The inventory conversion period is the total time needed for producing and selling the product. Typically, it includes:  (a) raw material conversion period (rmcp), 
(b) work-in-process conversion period (WIPCP), and
(c) finished goods conversion period (FGCP).
The debtors’ conversion period is the time required to collect the outstanding amount from the customers. The total of inventory conversion period and debtor’s conversion period is referred to as gross operating cycle (GOC). In practice, a firm may acquire resources (such as raw material) on credit and temporarily postpone payment of certain expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance investment in current assets. The creditors (Payables) deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases. The difference between (gross) operating cycle and payables deferral period is net operating cycle (NOC). If depreciation is excluded from expenses in the computation of operating cycle, the net operating cycle also represents the cash conversion cycle (CCC). It is net time interval between cash collections sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out firm’s operations. The firm has to negotiate working capital from sources such as commercial banks. The negotiated sources of working capital financing are called non-spontaneoussources. If net operating cycle of a firm increases, it means further need for negotiated working capital.

Operating cycle / Working capital calculation
Let us identify the computation of the length of operating cycle of Keels Food Production PLC.  Details| 2008| 2009| 2010| 2011|
 |  |  |  |  |
Toal Inventory| 156,796,254| 189,756,740| 183,976,555| 298,548,217|  |  |  |  |  |
Raw Material| 79,337,528| 78,601,943| 84,081,511| 157,238,409| Work-in-Progress| 13,188,123| 18,244,938| 19,764,694| 19,828,485| Finished Goods| 52,791,880| 80,335,174| 67,296,045| 106,084,633|  |  |  |  |  |

Trade and Other Receivables| 163,001,863| 208,636,929| 177,913,715| 206,857,207| Trade Payables| 72,414,359| 82,741,092| 121,240,836| 105,046,787|  |  |  |  |  |
Cost of Sales| 1,154,803,680| 1,411,542,320| 1,419,573,066| 1,650,583,338| Revenue| 1,552,000,596| 1,792,635,312| 1,813,592,830| 2,162,880,267| Purchase| -| 1,410,806,735|...
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