Inventory and Ski
Case #3 Barnes plans to use the preceding ratios as the starting point for discussions with SKI 's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would inter-act to affect profits and EVA. Base on the data, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?
A company with a relaxed working capital policy would carry relatively large amounts of current assets in relation to their sales. It would be guarding against running out of stock or of running short of cash, or losing sales because of a restrictive credit policy. Working capital policy is reflected in a firm’s current ratio, quick ratio, turnover of cash and securities, inventory turnover and days sales outstanding or DSO. The ratios that are related to SKI, has large amount of working capital relative to its level of sales. An example would be the sales/inventories = 6.00 versus 8.00 for an average firm in its industry. This means that SKI is carrying a lot of inventory per dollar of sales. This ratio is the definition of a relaxed policy. Also, SKI 's DSO is relatively high. Since DSO is calculated as receivables/sales per day, a high DSO indicates a lot of receivables per dollar of sales. SKI seems to have a relaxed working capital policy, and a lot of current assets. How can we distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current assets because it is inefficient? Does SKI’s working capital policy seem appropriate?
SKI may choose to hold large amounts of inventory so they never run short on their inventory This way they are able to cater to customers who expect to receive their equipment in a short period of time. SKI may also choose to hold high amounts of receivables to maintain good relationships with its customers. However, if SKI is holding large stocks of inventory and receivables to better serve
A company with a relaxed working capital policy would carry relatively large amounts of current assets in relation to their sales. It would be guarding against running out of stock or of running short of cash, or losing sales because of a restrictive credit policy. Working capital policy is reflected in a firm’s current ratio, quick ratio, turnover of cash and securities, inventory turnover and days sales outstanding or DSO. The ratios that are related to SKI, has large amount of working capital relative to its level of sales. An example would be the sales/inventories = 6.00 versus 8.00 for an average firm in its industry. This means that SKI is carrying a lot of inventory per dollar of sales. This ratio is the definition of a relaxed policy. Also, SKI 's DSO is relatively high. Since DSO is calculated as receivables/sales per day, a high DSO indicates a lot of receivables per dollar of sales. SKI seems to have a relaxed working capital policy, and a lot of current assets. How can we distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current assets because it is inefficient? Does SKI’s working capital policy seem appropriate?
SKI may choose to hold large amounts of inventory so they never run short on their inventory This way they are able to cater to customers who expect to receive their equipment in a short period of time. SKI may also choose to hold high amounts of receivables to maintain good relationships with its customers. However, if SKI is holding large stocks of inventory and receivables to better serve