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How do you determine the optimum level of current assets?
a trade off between profitability and risks.
Ace industries has current assets equal to 3 million dollars The company's currerrent ratio is 1.5'and itsquick ratio is 1.o. what is the firm's level of current liabilities .what isinventories.?
If assets are 3 million and the current ratio is 1.5, the liabilities are 2 million. (current assets = 3 million/ current liabilities of 2 million = 1.5 current ratio.) Inventories have to be 1 million. The quick ratio is current assets = 3 million - 1 million inventory / current liabilities of 2 million equal a quick ratio of 1.
How do you calculate optimum level of current assets?
It depends on many factors. The demand for the product. when the demand for the product is established. then you make projections for sales. The Return on investment should be high. its a results of net profit/(current assets + fixed assets). The ROI will be high when the denominator is low. So when you keep current asset level low at the year end. the ROI will be high. You can keep the current assets level low only when your cash conversion cycle(CCC) is shorter. you can have shorter CCC. only when the Inventory turnover, and Recievables turnover are high and payables turn over is low (or) Inventory turnover, and Recievables turnover are low and payables turn over is high (if you have good credit terms with suppliers). Over the years it was a bone of contention for many finance manager on how to manage an optimum level.still a lot of work is going on to find out the optimum levels for current assets.
How is a cash budget used to help manage current assets?
A cash budget helps minimize current assets by providing a forecast of inflows and outflows of cash. It also encourages the development of a schedule as to when inventory is produced and maintained for sales (production schedule), and accounts receivables are collected. The cash budget allows us to forecast the level of each current asset and the timing of the buildup and reduction of each.
Difference between working capital and capital employed?
Capital EmployedTotal resources are also known as total capital employed and sometimes as gross capital employed or total assets before depreciation. Thus total capital consists of all assets fixed and current. In other words, the total of the assets side of the balance sheet is considered as total assets employed.While calculating capital employed on the basis of assets, following points must be noted.* Any asset which is not in use should be excluded.* Intangible assets like goodwill, patents, trademarks etc should be excluded. If they have some potential sales value, they should be included.* Investments which are not concerned with business, should be excluded* Fictitious assets are to be excludedWorking CapitalWorking capital is defined as the excess of current assets over current liabilities. Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include:* Cash and Bank balances* Receivables* Inventory· Raw materials, stores and spares· Work-in-progress· Finished goods* Prepaid expenses* Short-term advances* Temporary investmentThe value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold, accounts receivables are created. The collection of accounts receivables brings cash into the firm. The cycle starts again.Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year. These include:* Creditors for goods purchased* Outstanding expenses i.e., expenses due but not paid* Short-term borrowings* Advances received against sales* Taxes and dividends payable* Other liabilities maturing within a yearWorking capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.Permanent and Temporary Working CapitalConsidering time as the basis of classification, there are two types of working capital viz, 'Permanent' and 'Temporary'. Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year. A firm will finance its seasonal and current fluctuations in business operations through short term debt financing. For example, in peak seasons more raw materials to be purchased, more manufacturing expenses to be incurred, more funds will be locked in debtors balances etc. In such times excess requirement of working capital would be financed from short-term financing sources.The permanent component current assets which are required throughout the year will generally be financed from long-term debt and equity. Tandon Committee has referred to this type of working capital as 'Core Current Assets'. Core Current Assets are those required by the firm to ensure the continuity of operations which represents the minimum levels of various items of current assets viz., stock of raw materials, stock of work-in-process, stock of finished goods, debtors balances, cash and bank etc. This minimum level of current assets will be financed by the long-term sources and any fluctuations over the minimum level of current assets will be financed by the short-term financing. Sometimes core current assets are also referred to as 'hard core working capital'.The management of working capital is concerned with maximizing the return to shareholders within the accepted risk constraints carried by the participants in the company. Just as excessive long-term debt puts a company at risk, so an inordinate quantity of short-term debt also increases the risk to a company by straining its solvency. The suppliers of permanent working capital look for long- term return on funds invested whereas the suppliers of temporary working capital will look for immediate return and the cost of such financing will also be costlier than the cost of permanent funds used for working capital.Gross Working CapitalGross Working Capital is equal to total current assets only. It is identified with current assets alone. It is the value of non-fixed assets of an enterprise and includes inventories (raw materials, work-in-progress, finished goods, spares and consumable stores), receivables, short-term investments, advances to suppliers, loans, tender deposits, sundry deposits with excise and customs, cash and back balances, prepaid expenses, incomes receivable, etc.Gross Working Capital indicated the quantum of working capital available to meet current liabilities.Thus, Gross Working Capital = Current AssetsNet Working CapitalNet Working Capital is the excess of current assets over current liabilities, i.e. current assets less current liabilities.This concept of working capital is widely accepted. This approach, however, does not reflect the exact position of working capital due to the following factors:* Valuation of inventories include write-offs* Debtors include the profit element* Debts outstanding for more than a year likewise debtors which are doubtful or not provided for are included as asset are also placed under the head 'current assets'* Non-moving and slow-moving items of inventories are also included in inventories, and* Write-offs and the profits do not involve cash outflowTo assess the real strength of working capital position, it is necessary to exclude the non-moving and obsolete items from inventories. Working Capital thus arrived at is termed as 'Tangible Working Capital.'
How do you determine the optimum level of current assets?
a trade off between profitability and risks.
How you can combine liability structure and current assets decision?
The level of current assets and method of financing those assets are interdependent.A conservative policy of "high" level of current assets allows a more aggressive method of financing current assets.A conservation method of financing ( all- equity) allows an aggressive policy of "low" levels of current assets.
The term permanent current assets implies?
some minimum level of current assets that ar not self-liquidating.
How do you determine the optimal level of advertising?
the optimal level of advertising expenditure for the firm is determined where the marginal revenue increase in costs of advertising are equal to the marginal increase in revenue
What is the significance of working capital management to match sales and production?
Effective working capital management ensures that the company has enough funds to operate smoothly and meet its short-term obligations. By matching sales and production levels, the company can optimize its cash flow, minimize excess inventory, and reduce the need for costly external financing. This can lead to improved efficiency, profitability, and overall financial health.
Ace industries has current assets equal to 3 million dollars The company's currerrent ratio is 1.5'and itsquick ratio is 1.o. what is the firm's level of current liabilities .what isinventories.?
If assets are 3 million and the current ratio is 1.5, the liabilities are 2 million. (current assets = 3 million/ current liabilities of 2 million = 1.5 current ratio.) Inventories have to be 1 million. The quick ratio is current assets = 3 million - 1 million inventory / current liabilities of 2 million equal a quick ratio of 1.
Liquidity ratios Flying Penguins Corp has total current assets of 11.845.175 current liabilities of 5.311.020 and a quick ratio of 0.89 What is its level of inventory?
2
If you have Marginal Cost and Marginal Damages how do you find the optimal level of output?
The optimal level of output is where marginal costs = marginal damages.
How do you calculate optimum level of current assets?
It depends on many factors. The demand for the product. when the demand for the product is established. then you make projections for sales. The Return on investment should be high. its a results of net profit/(current assets + fixed assets). The ROI will be high when the denominator is low. So when you keep current asset level low at the year end. the ROI will be high. You can keep the current assets level low only when your cash conversion cycle(CCC) is shorter. you can have shorter CCC. only when the Inventory turnover, and Recievables turnover are high and payables turn over is low (or) Inventory turnover, and Recievables turnover are low and payables turn over is high (if you have good credit terms with suppliers). Over the years it was a bone of contention for many finance manager on how to manage an optimum level.still a lot of work is going on to find out the optimum levels for current assets.
Nature and scope of working capital?
Nature of Working CapitalWorking Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, the Current Liabilities and the inter-relationship that exists between them. The term Current Assets refers to those Assets which in the ordinary course of business can be, or will be, converted into Cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The Major Current Assets are Cash, Marketable Securities, Accounts Receivables and Inventory.Current Liabilities are those Liabilities, which are intended at their inception, to be paid in the ordinary course of business, within a year out of the current assets or the earnings of the concern .The basic Current Liabilities are Accounts Payable, Bills Payable, Bank Overdraft and outstanding expense. The goal of Working Capital Management is to manage the firm's Assets and Liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy.The Current Assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. Each of the short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current assets and current liabilities is, therefore, the main theme of the theory of management of workingcapital.
An individual performs best at the optimal?
arousal level
What is the bodies optimal water level?
The human body's optimal water level is approximately 72%. This varies slightly from individual to individual but fluctuations based on water intake and loss.
