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Lecturer notes on Financial Mana calculations, concepts and theories.
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STUDY UNIT 7Inventory, Debtors, Creditors and Cash
Working Capital Cycle = Debtors Days + Inventory days – Creditors.
The company should attempt to shorten their working capital cycle.
In the example it taken 190 days from purchasing the stock until the company sell it
to the debtor until the company receive the money from their debtors.
The creditors wants payments after 90 days and at this time the company did not
even sell their stock.
Under the conservative we have more current assets (R55m) we the company is
causes. Under Moderate the company have R45m and is regarded as average and
under the Aggressive the company have less current asset R35m.
The return on asset under the conservative is low (EBIT R9m ÷ Net Assets R75m x
100) = 12%
Aggressive means the company has less current assets to cover their liabilities and
the Conservative means the company has more current assets to cover their
liabilities.
But the Return on Assets (ROA) is the opposite: Under the aggressive the company
has more current assets and under the conservative the company has less current
assets.
With the conservative policy the company will use more long-term financing to
finance their assets.
With the aggressive policy the company will use more short-term financing to finance
their assets.
IDENTIFY THE FACTORS THAT WILL INFLUENCE FUTURE SALES
There are various factors that influence the growth of future sales, and these include
the current promotional activities, loyalty rewards such as the Woolworths loyalty
programme, disposable incomes and tastes and preferences of customers. Current
customer satisfaction levels also play a role in determining the amount of future
sales.
, Future sales are important, because it will lead to debtors eventually and cash which
is part of a company’s working capital cycle. Therefore it is important that the
company look after their customers and make sure that the customers are satisfied
to ensure future sales. The company will have for example loyalty programmes such
as PNP smart shopper cards where you can earn points, express cards from
Checkers, etc. To make sure that the customer buy from them all the time and in this
way create some sort of loyalty
Factors to consider when making up a sales forecast.
A sales forecast is a prediction of what the sales will be in the future.
The company base the sales forecast on historical data, because based on whatever
has happen in the past is an indicator of what will happen in the future.
Also Economic Indicator is interest rates and exchange rates, but there are
increases and decreases in these economic indicators during the year.
The company also have to look at their competitors how well they are doing, what
are they pricing their product.
What are the suppliers up to are their business doing well or not.
Are their changes in the government regulation?
What is the capacity of the factory?
What does the market survey tell the company about their customers?
What promotional campaigns is the company using for advertising?
What pricing strategy do the company use for example market penetration pricing or
market skimming pricing?
Market-skimming pricing
According to Kotler and Armstrong [2014:336] many firms that invent new products
and set high initial prices to skim maximum revenues layer by layer from the
segments that are willing to pay the high price. The firm makes fewer but more
profitable sales. Blythe [2006:463] adds that, once the innovative consumers have
bought and competitors start to enter the market, the firm can drop the price and
skim the next layer of the market, at which point profits will start to rise.
Market-penetration pricing
Kotler and Armstrong [2014:337] describe this method as setting a low initial price in
order to penetrate the market quickly and deeply. The aim is to attract a large
number of buyers quickly and to gain a large market share.
Look at trends and variations that have happen overtime.
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