PLEASE REWORDS THESES PARAGRAPHS YOUR OWN WORDS. PLEASE DO NOT USE THE SAME EXCACT WORDS AS USED IN THE PARAGRAPHS.
Operating Cash Flow Calculation
1- Operating cash flow is calculated by added earnings before interest tax and depreciation then subtracting taxes. Opportunity cost is the cost of not going forward with a project or the cash outflows that will not be earned as a result of using an asset for another alternative. Depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes. Sunk costs are those costs that the company has already incurred. They cannot be reversed. Therefore, since the company will incur these costs even if the project is accepted or rejected, they are not part of the decision to accept or reject the project.
Working Capital Management
2- Building working capital for a business is extremely important for growth. If a business were to neglect their working capital they may find themselves in trouble with long term accounts payable. For example, if a business were to be in a retail field and needed inventory they would pay for a large amount of inventory from the working capital. So if the working capital is limited, the amount of inventory for the company to have on hand will also be limited. This neglect could potentially limit profits for a company. Maintaining working capital so all financials could be paid whether long term or short term is essential for the growth of any company.
Sales Budget
3- One of the things new companies need to look at in order to build a sales budget are industry benchmarks. New companies can use competing or comparable products as a benchmark. It is a good idea to look at the current trends in the market. Before making sales predictions, companies must analyze current inflation rates, unemployment, consumer spending patterns and market trends. It is important to look at all of these things even before starting a company. It would not make sense to try and sell a product that nobody is interested in. Sales budgeting needs to be as realistic as possible. Otherwise, the company will overstate its income for the year and the amount of inventory it needs.
Zero Working Capital Strategy
4- At my current company we have a lot of cosigned material which helps us hold a good portion of our material with basically extremely low costs. What consignment means is that we don't pay for the material until it is sold off the racks. So it's basically only the cost of the space the material is holding until it sells. Obviously whenever a company can find an arraignment like that it's extremely beneficial. We also keep a lot of inventory with a relatively low turn rate (despite my objections as the warehouse manager) either because it's consigned or because it keeps margins up.
I would recommend zero working capital for larger companies that own a lot of real estate. Becausethe entire inventory is capital that can be sold to meet debts. Creditors know this and will be more willing to do business with them. A small company should avoid this since creditors will be less likely to take on debt when they know the ship is running light and fast. This would also be a terrible policy for online companies since there is very little physical inventory with high value.
These paragraphs have to be answered like if you were talking to the person face to face.
5- This was a great post to help us understand how zero working capital strategy works and why working capital management is so important with companies that deal with inventory. A company can run into trouble if they are holding on to too much inventory without a demand for the product to be shipped out. It is a problem by having those liabilities without being able to profit for them. The amount of profit made in turn will be less as well because the company is spending too much to acquire the inventory. I would advise a company to use a management strategy that will make sure the amount of inventory that they hold on to is similar to the amount of demand from the consumers
6- Absolutely Nick, using the information from a multitude of other likewise companies can benefit the new company trying to enter the market. A great way to look at it is to take what works well with those companies and implement better solutions that those companies have issues with. Once you have created such then you may be able to find the niche of what makes your product or service different from theres. Using the financial statements from these companies can also give you information as trends within the market and how to accommodate and maximize the potential for benefiting off of the information analyzed.
7- I thought about this, having a very high working capital could be a bad thing when thinking from the perspective of taxes. Having too high of a working capital at the end of the year could raise the amount of profit margin. Assuming that the working capital is current and not carried over from the previous year. If profit margin raises the amount that a company could have to pay in taxes could be costly. However using this money to constantly grow the business rather that recklessly spending would be best. Assuming that this business we are referring to is an LLC, even owner draws would be taxed like profit.
8- One of the goals of every company should be to satisfy its shareholders. If the company has a very low working capital, it could cause investors to pressure the company into filing for bankruptcy. Having a high working capital may please shareholders, but it may be an indication of operational efficiency. Instead of accruing capital and not doing anything with it, companies must work on creating products that will generate more profits. Reinvesting is essential if the company plans on expanding its business. One important thing to constantly analyze is the collection cycle or the time it takes to collect from customers.