Question

The Belgian Vandeputte Group has the following operating structure: sales = 100, raw materials used in the business = 30, direct production costs = 40, administrative costs = 20. Operating cycle: raw materials inventories = 15 days, length of production cycle = one month, inventories of finished products = 15 days. Payment terms: suppliers two months, customers one month, other costs paid in cash.
Assuming zero VAT, calculate working capital in days of sales. The production cycle lasts one month, which means that in-progress inventories represent one month of raw materi-als and 15 days of production costs.

Exercise 1: Van de Putte Group	M€
Sales	100
Raw materials used in the business	30
Direct production costs	40
Administrative costs	20
Operating
Raw materials inventories	15	days	Days by months
Length of production cycle	1	months	30
Raw materials	1	months
Production costs	15	days
Finished products inventories	15	days
Payments terms
Suppliers	2	months
Customers	1	months
	% of sales	Time taken to shift goods or payment period	Value in days of sales
Raw materials inventories	30%	15.0	4.5
Work in progress
Raw materials	30%	30	9
Production costs	40%	15	6
Finished products inventories	90%	15	13.5
Trade receivables	100%	30	30
Trade payables	-30%	60.0	-18.0
Total			45.0

Need 200 words explanation on what this calculation means.

Answer 1

Answer is given below

This calculation is on Operating cycle for the firm. Operating cycle is the period involved in purchase of raw material, holding work in process inventory, converting them to finished goods, selling to customers and then collecting the cash from customers

Net Operating cycle involves the Gross Operating cycle minus days involved for paying accounts payable to creditors. The higher the net Operating cycle the more the working capital financing needed by the firm.

In the given case Belgian Vandeputte Groups is having Operating cycle of 63 days. The firm is having maximum cycle in Accounts receivable conversion. The firm is extending credit period of 30 days to its customers to pay. The level of inventories carried by the firm seems to be low but higher accounts receivable days is leading the higher gross operating cycle. The credit policy of the firm can be reviewed to improve operating cycle period. The credit policy to customers can be evaluated through offering discounts and doing cost benefit analysis.

The firm is taking only 18 days of credit from the vendors hence the net operating cycle is 45 days. Firm needs to finance this net operating cycle through working capital financing. Alternatively the firm can partly increase its credit period also from the suppliers to lower the working capital requirements and reduce the financing cost.