Explain the difference between permanent and temporary working capital, and describe what a firm could do to minimize risk.
Evaluate how small adjustments made to total cash conversion can have a large impact upon the financial health of a company.
Describe Economic Order Quantity (EOQ Using the EOQ formula and an example product for your business, determine the optimal quantity of the item to purchase that will help to minimize the annual total costs of keeping that item in inventory.
Describe what a Just-in-Time (JIT) inventory system is and its significance in reducing inventory costs.
The working capital of a business is found by subtracting the liabilities from the assets. The amount left over is the capital of the business, that they will use to fund their day to day operations. A business that manages their working capital, ensures that there is a budget at their need to use for their day to day business operations. The amount of working capital can help you determine the company’s or business financial stability.
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Permanent working capital, is when a company require funds to cover the period of time between converting their assets into cash. Temporary capital, is when the company needs funds for shorter period of times for seasonal efforts or added inventory.
Cash conversion is used to measure the effectiveness of how a company manages their finances and overall health of the company. The calculation shows how fast the company can convert cash into inventory or accounts payable. The longer it takes a business to turnover profit, the faster they can fall into debt when there is no working capital to cover unexpected expenses. Any delay leaves a gap of time that needs coverage, leaving the company in risk.
Economic Order Quantity is the order quantity of inventory that minimizes the total cost of inventory management. In inventory there are ordering cost and carrying cost. Since the ordering and carrying are opposites cost in order to minimize the total inventory cost, you would have to place more orders that would require larger orders which turn increases the total carrying cost.
A Just In time inventory were made to improve the efficiency and reduce extra cost in inventory. The Just In Time systems reduces cost in inventory by reducing the amount of material on hand in the production facility. The company can reduce the cost of storing excess inventory and eliminate products or material that may become obsolete while on stock. When companies have overstocked or large quantities they tie up company funds, that could be used and maximized elsewhere in the business. So the Just in time system reduce cost and in return help invest back into the business to grow and expand.
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