Excellence Electrics Ltd. - Business Finance

...

[pic 3]

Figure 2: Liquidity in the Cash Flow Statement

Both of these concepts play the significant role in company accounts. One is the regular predictor for the short term and another one is the predictor for the long term. Yet, both of these measures should get equal treatment for further improvement.

2. Application of the concept of working capital management to the company and how the current situation is a reflection of how the business in managed.

Working capital management is the concept for dealing with the working capital of the organization. It refers to the strategy using which the control and utilization is done for the working capital of the organization. Working capital is the capital required for conducting regular business activities and calculated from measuring the difference between the current assets and current liabilities. Therefore, managing working capital is necessary for the proper conduction of the business operations. It is applied in the organization to maintain required capital for clearing up the short term liabilities. However, there are usually three key elements through which management of working capital is done for monitoring the cash flow, short term assets and liabilities (Klein, 2010). These ratios are the Working capital ratio, Collection ratio and Inventory turnover ratio.

Working Capital Ratio is the ratio of measuring the capability of the company to meet the current liabilities through the assets. It actually measures the liquidity efficiency of the organization. It is calculated by making division between the current assets and the current liabilities. Therefore the formula is, Working Capital Ratio = Current Assets ÷ Current Liabilities (Preve and Sarria-Allende, 2010).

Collection Ratio is the ratio of measuring the capability of the company to collect its payment from the accounts receivable it is owed. It actually measures the average time period for collection. It is calculated by making division between the accounts receivable and the net sales and then again multiplying it by 365 days (Weil, 2017). Therefore the formula is, Collection Ratio = (Accounts Receivable ÷ Net Sales) × 365.

Inventory Turnover Ratio is the ratio of measuring the capability of the company to sell its inventory and replenish it. It actually measures the number of times it can replenish the inventory. It is calculated by making division between the cost of goods sold and the inventory. Therefore the formula is, Inventory Turnover Ratio = COGS ÷ Inventory.

The application of working capital management therefore plays significant role in gauging the overall financial health of the organization through measuring the liquidity, effectiveness and efficiency (Sagner, 2013). However, this concept has been applied with the case of Excellence Electrics Ltd. the present situation of Excellence Electrics Ltd. (EEL) is critical as it is lacking efficient management of their consignment orders and financial obligation. Besides, EEL has been threatened to face the legal action if proper steps are not taken.

Dieter Braun, the manager of EEL has not managed the financial aspects of the organization properly. As a result, inefficient management of the consignment orders has led to the arousal of the Radio Formidable issue from faulty workmanship. Although, there is plenty of orders are coming, EEL is owed £1.5 million pounds for a series of large orders placed by Canterbury. It implies the inefficiency of EEL to manage its working capital. In addition, Dieter does not find it’s important to push their customers for making clearance of the payments. As a result, EEL suffers from inefficiency with the high rate of collection ratio. Moreover, EEL has built up large amount of stocks which has tied up their capital unnecessarily. Thus, inventory management is not done properly by EEL.

3. Steps needed to be taken to improve the company’s working capital management.

Considering the present case of Excellence Electrics Ltd. it can be seen that the unstable situation of working capital has led them to take measures immediately. As EEL lacks effectiveness and efficiency, they must focus on the steps to overcome their shortcomings. In this regard, following steps can be recommended to improve their working capital management.

Steps needed to be taken by Excellence Electrics Ltd.

At first, Excellence Electrics Ltd. should maintain their working capital on a regular basis. Hereby, EEL can swap the short term obligations with the long term obligations.

Secondly, Excellence Electrics Ltd. should develop their average collection period as the higher is the collection ratio, the higher is the efficiency.

Thirdly, Excellence Electrics Ltd. should properly manage their working capital management as regular replenishment of the stocks prevents tying up unnecessary capital.

Finally, Excellence Electrics Ltd. should focus on reducing the level of the inessential expenses and only invest on required sectors to avoid extraneous expenditure to maintain effective working capital.

Part 2

1. The stages of the capital budgeting process and the main capital investment appraisal methods.

In order to make proper business decision regarding capital investment, every manager needs to conduct different analysis that will help them to support their decision making (Al-Ali, 2003). However, Excellence Electrics Ltd. at present needs proper direction for their working capital management. Hereby, the manager can utilize the capital budgeting process that is a six step procedure for evaluating the worth of the project to make investment.

Stages of the Capital Budgeting Process

[pic 4]

Figure 3: Capital Budgeting Process

1. At the first stage, the capital budgeting process begins with the identification of the initial investment projects. Hereby, the available alternatives are figured out in terms of their profitability.

2. At the second stage, evaluation of the investment projects is done with along with their associated merits and demerits. Different capital budgeting techniques such as NPV, PP, ARR, IRR etc. are used to conduct the analysis (Capital Budgeting Valuation, 2013).

3. At the third stage, selection of the investment project is done in terms of their potential viability. The selection can include single or combined projects