Working Capital Simulation

Topics: Working capital, Finance, Economics Pages: 3 (861 words) Published: January 20, 2013
LT10 – B
In selecting what option to select the team came up with the following criteria: 1.) Selected option should lead to a reduction in working capital requirement and reduce short term debt in the process. 2.) Selected option should reduce the Cash Conversion Cycle. 3.) Selected option should free up locked capital in receivables and inventories. 4.) Selected option should lead to a zero working capital policy in the long run. SELECTED OPTIONS:

We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit all the selection criteria we stated above.

The options we chose led to a 44% drop in working capital requirement, drop from 159 days to 128 days in the cash conversion cycle and a 87% drop in debt. Overall we met our expectations of reducing working capital requirement and freeing up additional capital. EBIT has dropped immediately but by 2015 net income was higher by $8,000 despite the drop in $255,000 drop in EBIT in 2013. This surprised the team as we did not expect that in the long run by improving the working capital requirements of the company we reduced costs and increase net income resulting to a total created value of $691,000 for the firm. Despite the immediate decrease in sales in 2013, the overall financial position of the company is better in the long run, and moreover we have a remaining credit limit of approximately $2.8 million which is almost equal to the initial amount of credit borrowed in 2012. PHASE 2:

From the learning’s and outcome of phase 1 the following selection criteria was used: 1.) Selected option should yield a percentage increase in sales with a small percentage increase in working capital requirement. 2.) Selected option should not...
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