WHITE CELLS ARE ADJUSTABLE

Kristoffer Burnett - Certified Management Accountant, 2009-2011

Managing Current Assets Example

INPUT Cash Cost per investment transaction Total cash needed for the next year Expected annual return on investments Inventory Item for economic order quantity (EOQ) Cost per purchase order/setup for DM1 Annual demand for DM1 Annual carrying cost per unit of DM1 DM1 2,822 124,245 1.02060 This can be either a direct material or a finished good. These are the fixed costs incurred with every purchase order/setup. Examples include shipping, purchasing department expenses, and customs fees This is the amount needed (or forecasted) for production or sale These are the per unit variable costs associated with the holding of this item. Examples include the cost of capital, storage, and obsolescence $ 100 This is the cost incurred on every purchase or sale of an investment. Examples include, broker commissions, employee effort, and resource use $ 14,805,695 This is the forecast of all cash expenditures anticipated for the year 5.44%

$ $

OUTPUT Cash Optimal cash balance Inventory EOQ for DM1 $

233,308

26,212

Notes: 1 Due to the subjective nature of the inputs for these calculations, it might be in the organization's best interest to be conservative and to use this information merely as a guideline. Care should be taken to ensure that there are no shortages of cash or inventory.

WHITE CELLS ARE ADJUSTABLE

Kristoffer Burnett - Certified Management Accountant, 2009 -2011 Small business solutions at http://www.imperoco.com

Managing Current Assets Example

INPUT Accounts Payable Vendor name Total payment period for Vendor1 (in days) Discount days for Vendor1 Discount % for Vendor1 Accounts Receivable Factor fee Factor interest rate on monies advanced Average monthly sales Amount of reserve Credit terms (in days) 2.00% 18.00% $ 100,000 10.00% 60 This is the amount of the receivables that the factor will not pay back This is the interest rate the factor will charge on receivables outstanding This amount is the average monthly receivables that could be sold to a factor A factor will typically hold a certain amount back (reserve) to cover potential bad debts This is the number of days within which customers have to pay the factor Vendor1 30 The number of days within which payment is due, after which a late fee would typically be assessed 10 The number of days within which a discount could be realized if payment is made 2.00% The amount of the discount for early payment

OUTPUT Accounts Payable Annual cost of not taking discount from Vendor1 Accounts Receivable Amount to be received from the factor immediately Monthly cost of using a factor assuming return of reserve $ 85,396 This is the amount of cash received immediately upon transfer of receivables to the factor $ 4,604 This equals the amount of receivables foregone due to factoring. This number can be compared to the cost of handling AR within the organization 44.59% This is the compounded annual interest rate accrued due to holding cash the days between the discount period and the payment period