0
Want this question answered?
Be notified when an answer is posted
Add your answer:
Earn +20 pts
What are the Advantages and disadvantages of keeping stock to the business?
Advantages of Keeping Stock: Meeting customer demand promptly. Reduced lead times and quicker order processing. Bulk purchasing discounts. Buffer against supply chain disruptions. Seasonal demand management. Emergency preparedness. Disadvantages of Keeping Stock: Storage costs. Risk of obsolescence. Tied-up capital. Inventory management challenges. Risk of shrinkage and theft. Market fluctuations impacting sales.
Role of financial management in the business?
Financial management is very important or significant because it is related to funds ofcompany. Financial management guides to finance manager to make optimum position of funds. We can clearify its value in following 5 points.1. With study of financial management, we can protect our business from pre-carious mis-management of money. Suppose, you are small businessman and you took short-term loan and financed fixed assets with this loan. It means, you have to pay loan within one year but fixed assets can not be sold within one year. In the end of year, you have not enough money to pay this long term debt and this will create risk to your business's existence. You will become insolvent. This is the simple example of mismanagement of money in your small business, but we do large scale company business, importance of financial management is greater than small business. We should invest in fixed asset if there is any other source of funds. In financial management, we make optimum capital structure and we should buy all fixed assets out of share capital money because, it will reduce the risk of repayment.2. In financial management, we deeply study our balance sheet and all sensitive facts should be watched which can endanger our business into loss. For example, a closing balance sheet shows you, you have to pay large amount of debt in next year and you have blocked all the money by purchasing goods or inventory. Financial management teaches you that this is not good outflow of funds which is invested in inventory. Blocked inventory never generate earning and your balance sheet's stock value gives you idea that your company is not capable to sell products quickly. Financial manager can elucidate you that overstocking will increase godown expenses one side and it is also risky due to the danger of damage the stock. Moreover, it increases risk of liquidity. Inventory management is the part of financial management and merely using inventory management can be the best way to solve the problem of overstocking.3. Yesterday, I am searching on Google "who are getting high salary in the world" and it is quite startling for all of us that financial managers whose duty is to use the funds of company effectively, are getting salary more than $110,640 per year ( information which is given by Forbes Magazine). This fact obviously reveals the significance of financial management.4. An imprudent man never thinks return on investment but you are not imprudent. So, get some knowledge of financial management, you can not endanger your money.5. Financial management works under two theories. One theory reins bad sources of fund. This theory elucidates us that we should think cost, risk and control and these should be minimum when we get money from others. Only financial management makes good financial structure to minimize cost, risk and control of borrowed money. Second theory elucidates or clarifies us that we should think about time, risk and return before investing our money. Our ROI should be more than our cost of capital. Our risk of investment should be least. We should get our money with high return within very short-period. All above things can be possible only after study financial management.
Why are liquidity ratios important in bank lending?
Businesses use a variety of performance evaluation measures to analyze the results of their actions. Investors perform a variety of calculations to review the actions of a particular company. Both company management and investors spend time focusing on the company's "liquidity." Liquidity considers the company's ability to pay its current obligations and its cash levels. Certain financial ratios provide important information regarding a company's liquidity.In general, the greater the coverage of liquid assets to short-term liabilities, the more likely it is that a business will be able to pay debts as they become due while still funding ongoing operations. On the other hand, a company with a low liquidity ratio might have difficulty meeting obligations while funding vital ongoing business operations.Liquidity ratios are sometimes requested by banks when they are evaluating a loan application. If you take out a loan, the lender may require you to maintain a certain minimum liquidity ratio, as part of the loan agreement. For that reason, steps to improve your liquidity ratios are sometimes necessary.When analyzing the financial health of a firm there is four different groups of ratios that the analyst will consider. The groups are liquidity ratios, financial leverage ratios, efficiency ratios, and profitability ratios. In analyzing liquidity ratios, how they are defined and who uses them will be discussed. Problems associated with liquidity ratios will be addressed along with adjustments that are to be made to these ratios. Analysts will then be able to make correct assumptions about the liquidity of a firm.The most used liquidity ratios are: ratios concerning receivables, inventory, working capital, current ratio, and acid test ratio. Other ratios related to the liquidity of a firm deal with the liquidity of its receivables and inventory. The ratios indicating the liquidity of a firm's receivables are days' sales in receivables, accounts receivable turnover, and account receivable turnover in days. Days' sales in receivables relate the amount of accounts receivable to the average daily sales on account. This is computed by gross receivables divided by average net sales per year. Short-term creditors will view this as an indication of a firm's liquidity. Internal analysts should compare it to the firm's credit terms to analyze if the firm is managing its receivables efficiently. The days' sales in receivables should be close to the firm's credit terms. Accounts receivable turnover indicates the liquidity of a firm's receivables. This is measured in times per year and is computed by net sales divided by average gross receivables. This figure can also be expressed in days by average gross receivables divided by average net sales for the year. Inventories are a significant asset of most firms; thus they are indicative of a firm's short-term debt paying ability. The liquidity of a firm's inventories can be analyzed through the use of the following ratios: days' sales in inventory, inventory turnover, and inventory turnover in days. In calculating days' sales in inventory the analyst would divide ending inventory by a daily average of cost of goods sold. The result is an estimate of the number of days that it will take for the firm to sell current inventory. Inventory turnover is calculated by cost of good sold divided by average inventory. This forecasts the liquidity of the inventory and is expressed as times per year. This formula can be revised by dividing average inventory by average daily cost of goods sold so that the turnover is expressed in the number of days. Creditors consider low inventory turnover as a liquidity risk associated with the firm. Management uses inventory turnover to utilize effective inventory control. If it is too high the firm may be losing sales due to not enough inventories. If too low there may be a problem with overstocking or obsolescence and the cost associated with carrying such inventory. Working capital is defined as current assets minus current liabilities. Analysts to determine the short-term solvency of a firm calculate this ratio. Management uses this ratio, since some loan agreements or bond indentures contain stipulations concerning minimum working capital requirements. A firm's current ratio is determined by current assets divided by current liabilities. This measures a firm's ability to meet is current liabilities out of its current assets. An average of two to one is usually the norm. A shorter operating cycle will result in a lower current ratio whereas; a longer operating cycle will result in a higher current ratio. The current ratio shows the size of the relationship between current assets and liabilities, enhancing the comparability between firms.The acid test ratio (Quick ratio) is computed by current assets minus inventory divided by current liabilities. Thus this relates the most liquid assets to current liabilities. This is the most stringent test of liquidity. The usual guideline for the ratio is one to one. Short-term creditors will use this as an indication of a firm's ability to satisfy its short- term debt immediately. The management of the firm will have a greater difficulty borrowing short-term funds if the firm has a low quick ratio. If the ratio is very low, it is an indication that the firm will not be able to meet its short-term obligations. When using liquidity ratios the analyst will start with receivables and inventory, if a liquidity problem is suggested further analysis using the current and quick ratio will be used and the analyst will form an opinion accordingly.Analysts use liquidity ratios to make judgments about a firm, but there are limitations to these ratios. The liquidity of a firm's receivables and inventories can be misleading if the firm's sales are seasonal and or the firm uses a natural business year. The analyst would then adjust the figures accordingly to compare with other firms. The valuation method used will have a major impact on the firm's liquidity of its inventory. Valuation of a firm's inventory under the Last-In-First-Out (LIFO) approach will cause an understatement of inventory with will carry over as an understated current ratio. The use of LIFO may cause unrealistic days' sales in inventory and a much higher inventory turnover. The analyst would take the valuation method used into account when comparing with other firms. One way to judge the liquidity of a firm is to use not only traditional liquidity measures but also consider certain cash flow ratios. In doing liquidity analysis cash flow information is more reliable than balance sheet or income statement information. The cash flow ratios that test for solvency and liquidity are: operating cash flow (OCF), funds flow coverage (FFC), cash interest coverage (CIC), and cash debt coverage (COC). Cash flow ratios determine the amount of cash generated over a period of time and compare that to short-term obligations. This gives a clearer picture if the firm has a liquidity problem in connection with its short-term debt paying ability. Operating cash flow is computed by dividing cash flow from operations by current liabilities. This shows the company's ability to generate the resources needed to meet current liabilities. The funds flow coverage ratio is computed by dividing earnings before interest, taxes plus depreciation and amortization (EBITDA) divided by interest plus tax adjusted debt repayment plus tax adjusted preferred dividends. This ratio will help determine if the firm can meet its commitments. A measurement of one from this ratio indicates that the firm can just barley meet its commitments, less than one indicates that borrowing is needed to meet current commitments. The cash interest coverage ratio is computed by the summation of cash flow from operations, interest paid, and taxes paid divided by interest paid. This will help the analyst determine the firm's ability to meet its interest payments. If the firm is highly leveraged it will have a low ratio and a ratio of less than one places serious concerns about a firm's ability to meet its interest payments. The cash debt coverage is calculated by operating cash flow minus cash dividends divided by current debt. This indicates the firm's ability to carry debt comfortably. The higher the ratio the higher the comfort level. All of the cash flow ratios are not uniform but vary by industry characteristics. The analyst would then adjust his assumptions accordingly to assess the liquidity of a firm.Businesses use a variety of performance evaluation measures to analyze the results of their actions. Investors perform a variety of calculations to review the actions of a particular company. Both company management and investors spend time focusing on the company's "liquidity." Liquidity considers the company's ability to pay its current obligations and its cash levels. Certain financial ratios provide important information regarding a company's liquidity.Bill Payment:A primary reason liquidity ratios require attention involve the company's ability to pay its bills. Liquidity ratios compare the current assets of a business to the current liabilities. The current assets represent the resources available for paying bills. Current liabilities represent the bills waiting to be paid. Investors want to see that companies pay their bills without struggling. Creditors want to see that the company holds enough financial resources to meet its current obligations as well as future obligations that may arise from business with the creditor. Future Investments:Businesses consider financial investments, such as purchasing new equipment or new product launches, as they plan their future strategy. Future investments require financial resources to pay for those investments. When a company holds enough liquid resources to fund its strategic plans, it requires no additional financing to pursue those investments. Liquidity ratios provide management with information regarding its financial resources and whether it needs to obtain additional financing. Dividends:Companies often provide a return to stockholders through cash or stock dividends. Cash dividends provide a direct payment to the stockholders. Stock dividends provide stockholders with additional shares of company stock. Companies usually pay stock dividends when they want to compensate the stockholders but lack the cash to make cash dividend payments. Companies use liquidity ratios to determine whether to pay cash dividends or stock dividends to stockholders. The liquidity ratios demonstrate the company's ability to make cash dividend payments. Cash Balance:A company's cash balance serves several purposes. It provides financial resources for the company to pay bills. It maintains a financial safety net for unexpected expenses or a reduction in revenues. And it builds cash pool to allow the company to take advantage of opportunities. The company uses liquidity ratios to determine the level of cash the company currently has and what level of cash it needs to have.
What is overstocking of perishable goods?
hoarding
Why is overstocking warehouses not and effective solution for a problem of low availability?
overstocking increases sales costs na ahh its the inventory cost
Is it OK to have in my 55 liters tank neon tetras and mollies together?
Provided you are not overstocking they should be OK.
What are the consequences of overstocking?
unnecessarily ties up funds that might be more productive elsewhere (especially when inventory holding cost is high).
What increases soil erosion in areas where sheep and cattle graze upon grasses?
Drought, water, wind, lack of vegetative cover, overstocking
What strategies should be developed to address spoilage and obsolescence overstocking the warehouse availability of human physical resources and slow-downs in the supply chain?
The strategies that should be developed to address spoilage and obsolescence, overstocking the warehouse, availability of human physical resources, and slow-downs in the supply chain include inventory management standards, marketing methods, and alignment of demand and supply.
Why does fishes die in aquarium?
Typically this is because of cramped spaces (overstocking), improper filtration, bad water quality, or disease caused by the items already mentioned
What happened in 1885 and 1886 to bring the Cattle Kingdom to an end?
Two long harsh winters happened in 1885 and 1886 which would bring the Cattle Kingdom to an end. They were already on their way out because of the railroads and overstocking.
Can goldfish survive in Clorox?
If you honestly dont know the answer then you should not be keeping fish.
What causes nitrate levels to go up?
Any of the following are most common. Poor filtration,(maybe needs cycling) overstocking, (too many occupants) lack of water changes.(Good practice is at least 10% WEEKLY)
What are some twelve letter words with k in them?
backbreaking backhandedly backstopping backtracking backstabbing backpedalled backwardness blackballing cantankerous housewarming interlocking leathernecks overstocking quarterbacks skillfulness thankfulness undertakings unmarketable unmistakable unremarkable unthinkingly
What are the man made causes of flooding?
Man-made causes of flooding include urban development that disrupts natural drainage patterns, deforestation that reduces vegetation to absorb water, and inadequate infrastructure like poorly maintained drainage systems or levees that fail to contain floodwaters. Additionally, climate change can exacerbate flooding by increasing the frequency and intensity of extreme weather events.
