51. Asset Turnover and Strategic Management (LO2) Increasing net operating asset

Question

51. Asset Turnover and Strategic Management (LO2) Increasing net operating asset turnover requires some combination of increasing sales and/or decreasing net operating assets. For the latter, many companies consider ways to reduce their investment in working capital (current assets less current liabilities). This can he accomplished by reducing the level of accounts receivable and inventories, or by increasing the level of accounts payable. Required a. Develop a list of suggested actions that you, as a manager,could undertake to achieve these three objectives. b. Describe the marketing implications of reducing receivables and inventories, and the supplier, implications of delaying payment. How can a company reduce working capital without negatively impacting its performance

Explanation / Answer

a> Profit=(Sales Price-Cost Price) and this Profit can be increase by increasing the sales or decreasing the cost or both. Each time one makes a credit sales , there is a cost involved in terms of loss of interest and reduces profit. The cost price includes the cost of carrying inventory also and higher the inventory the lower will be the profit.Some of the ways in which higher profit can be made are:

b> Normally to increase sales one has to give higher credit that leads to higher receivable. Similarly to prevent any stock out and opportunity loss of sales , many companies maintain a higher inventory level. It is very unrealistic to operate on cash-and -carry only. May be the organization should have some arrangement with the banks to get the biils discounted/factored so that the money comes back for reinvestment. At the same time proper operational process and manpower should be available to follow-up with the debters to get back the receivables as soon as possible. Similarly , inventory should be maintained judiciously to meet the demands without incurring too much of inventory carrying cost.

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