Working Capital Simulation Essay Example for Free

Working Capital Simulation EssaySELECTION CRITERIAIn selecting what option to select the team came up with the following criteria 1.) Selected option should lead to a lessening in working large(p) requirement and reduce short enclosure debt in the process. 2.) Selected option should reduce the Cash Conversion Cycle. 3.) Selected option should unaffixed up locked seat of government in dues and inventories. 4.) Selected option should lead to a zero working capital letter policy in the long run.SELECTED OPTIONSWe decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. as well as these 2 options fit all the selection criteria we stated above.FINANCIAL RESULTS AND LEARNINGSThe options we chose led to a 44% drop in working capital requirement, drop from 159 long time to 128 days in the cash conversion cycle and a 87% drop in debt. Overall we me t our expectations of reducing working capital requirement and handout up additional capital. EBIT has dropped immediately but by 2015 net income was higher by $8,000 despite the drop in $255,000 drop in EBIT in 2013. This affect the team as we did not expect that in the long run by improving the working capital requirements of the company we reduced costs and step-up net income resulting to a total created value of $691,000 for the firm. Despite the immediate decrease in sales in 2013, the overall financial position of the company is advance in the long run, and moreover we have a remaining honorable mention limit of approximately $2.8 million which is almost equal to the initial amount of credit borrowed in 2012.PHASE 2SELECTION CRITERIAFrom the learnings and outcome of shape 1 the following selection criteria was used 1.) Selected option should yield a percentage sum up in saleswith a small percentage increase in working capital requirement. 2.) Selected option should not contribute to a significant degree in debt.SELECTED OPTIONSBased on our analysis we felt that options 1 and 2 fit the criteria we set for selection best. Combined they show a significant increase in EBIT with a lower increase in WCR. Although we foresee a significant increase in WCR we feel that the credit simple eye we have and the amount of capital we freed from phase would be sufficient to reduce the impact of the additional WCR.FINANCIAL RESULTS AND LEARNINGSOur choices led to a constant increase in net income over the three years. Short term debt increase by approximately 100% percent but steadily reduced over the undermentioned three years. We were happy with the positive growth of the company and the fact that we were able to pay off most of the initial short term funding call for by the increase in working capital requirement. Overall the current situation of the company in 2018 is good, although the total value created is less than 20% of that created in phase 1. From th is we learned that the value of the firm can be significantly increased more through a reduction in working capital requirement than through increasing the firms sales and net income.PHASE 3SELECTION CRITERIAFor this phase we decided to continue with the selection criteria from phase 1, and continue to try to increase sales with the minimum working capital requirement. We in like manner decided to minimize risk and not go with options that have, however small, a chance of creating net losses for the company.SELECTION OPTIONSBased on our analysis we felt that renegotiation of supplier credit terms would have a significant reduction to costs, given that most of the other suppliers would also agree to the new terms. Even though the company would need additional working capital we felt that the benefits exceed the additional funding needed. And given the current credit line utilization andincreased profitability of the company we thought that this was a sound option to take. We also t ook the global expansion strategy because from a strategic management point of view it seemed like the next step to take in order to increase the companys profitability in the long run. We again felt that we have sufficient credit and capital to venture into this expansion.FINANCIAL RESULTS AND LEARNINGSThere was a significant increase in net income but marginal increases in the succeeding 3 years. The most significant impact was in the short term debt wherein projected short term debt in 2021 would be zero, which made us very happy. This means that the company is nearing our goal of having a zero working capital requirement. This zero short term debt would also mean increased profits, and would improve our outstanding relation with the bank. Our final firm value is $4,259,000 which is significantly higher than it was in 2012. Overall we felt that we made the right decisions and our selection criteria were spot on. Value is not only generated in sales, but also in working capital re quirement. And through this exercise we also confirmed that firms with efficient working capital requirement would be the most competitive in the market.