Working Capital Simulation Essay Example for Free

Working Capital Simulation EssaySELECTION CRITERIAIn selecting what preference to select the team came up with the following criteria 1.) Selected option should lead to a reduction in working(a)s cap need and reduce short frontier debt in the process. 2.) Selected option should reduce the Cash variation Cycle. 3.) Selected option should free up locked capital in receivables and inventories. 4.) Selected option should lead to a adjust working capital policy in the long run.SELECTED OPTIONSWe decided to tighten accounts receivable and usher out poorly marketing products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit all the selection criteria we stated above. pecuniary RESULTS AND LEARNINGSThe options we chose led to a 44% drop in working capital requirement, drop from 159 days to 128 days in the silver conversion cycle and a 87% drop in debt. Overall we met our expectations of reducing working capital requirement and freeing 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 surprised the team as we did non expect that in the long run by improving the working capital requirements of the company we trim back costs and increase 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 better in the long run, and moreover we have a remaining credit 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 manikin 1 the following selection criteria was used 1.) Selected option should yield a percentage increase in saleswith a small percentage increase in working capital requirement. 2.) Selected option should not contribute to a significa nt 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 expression that the credit line we have and the amount of capital we freed from phase would be sufficient to reduce the electric shock of the additional WCR.FINANCIAL RESULTS AND LEARNINGSOur choices led to a constant increase in net income over the trine years. Short term debt increase by approximately 100% percent but steadily trim over the next three years. We were happy with the positive growth of the company and the fact that we were able to net off most of the initial short term funding required by the increase in working capital requirement. Overall the current situation of the company in 2018 is good, although the total value created is slight than 20% of that created in phase 1. From this we learned that the va lue of the firm can be significantly change magnitude more through a reduction in working capital requirement than through increase the firms sales and net income.PHASE 3SELECTION CRITERIAFor this phase we decided to shroud with the selection criteria from phase 1, and continue to try to increase sales with the minimum working capital requirement. We excessively 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, give 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 outweigh the additional funding needed. And given the current credit line utilization andincreased lucrativeness of the company we thought that this was a goodly option to take. We also took the global exp ansion strategy because from a strategic management point of reckon 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 win 3 years. The most significant impact was in the short term debt wherein projected short term debt in 2021 would be zero, which make 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 groovy 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 requirement. And through th is exercise we also confirmed that firms with efficient working capital requirement would be the most competitive in the market.