Posted on Sunday, 17th May 2009 by admin
Business Directory
show the ‘formula’ for coputing it. For what reasons is the composition of the working capital of a business as important as the amount of it?
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show the ‘formula’ for coputing it. For what reasons is the composition of the working capital of a business as important as the amount of it?
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Tags: Composition, Working Capital
Posted in Corporations | Comments (1)
May 20th, 2009 at 6:18 pm
Dolphin Hosting
Aside from fixtures, fixed expenses and descretionary expenditures, the next important consideration is inventory.
With planned sales as a starting point, one must determine these things.
Beginning Inventory
Sales plan
Ending inventory
Deliveries.
Once delivery time is known, then have enough beginning goods on hand to support those sales until the next delivery.
One must plan an ending inventory to support sales in the event of late deliveries. You can’t plan on zero with no inventory.
Thus:
Ending Inventory…plus Planned sales….less Inventory On Hand=Open to Buy. This can be the first purchases for a new opening, to be delivered pre-opening.
This holds true throughout any period, always taking into consideration delivery time, planned sales for the period and inventory on hand.
In some cases, Assortment will determine the initial amount of inventory needed.
All these things on a plan for 6 months or longer, will result in TO. Turnover. Meaning how many times in a given period that inventory turns.
Again, depending on delivery time, TO can be as often as 12 or more times in a year, or as low as 3-4 times per year.
This formula is the Sum of the first month beginning inventory plus each succeeding month Beginning inventory plus last month Ending inventory.
For a 6 month period you would have the sum of 7 inventories. For 12 months, 13.
Average that by dividing by 7 or 13, then divide the net sales by that average = TO.
A good plan will prevent overstocking, resulting in less old goods and reduced markdowns. It must be flexible, adjusting for an increase or a decrease in sales.
It must also be controlled on a seasonal basis for changes throughout the year.
There are peaks and valleys that must be planned, with more or less inventory.
TO allows the Capital Investment to support itself without additional capital and produce maximum sales and profits.
If interested, these are Excel templates for business analysis.