Assessment 1

Fantastic Holding Limited Working Capital Management Report

Fantastic Holding Limited Cash Conversion Cycle

Cash Conversion Cycle items

Inventory Days

Payable Days

Receivable Days

Cash Conversion Cycle

Calculations:

Inventory Days= Closing Inventory/ (COG/365days)

Inventory Days=
assessment 1= 119.86 days

Payable Days=
assessment 1 1

Payables Days=
assessment 1 2= 50.85 days

Receivable Days=
assessment 1 3

Receivables Days=
assessment 1 4= 3.40 days

assessment 1 5

Nik Scali Limited (Competitor) Cash Conversion Cycle

Cash conversion cycle items

Inventory Days

Payable Days

Receivable Days

Cash Conversion Cycle

Calculation:

Inventory Days=
assessment 1 6=144.2days

Payables Days=
assessment 1 7= 197.58 days

Receivables Days=
assessment 1 8=0.55 days

Analysis

The cash conversion cycle of our company is 72.41 days, which implies that it takes 72.41 days for the company to receive cash from debtors and pay suppliers. This explains why our company records high receivables than our competitor Nick Scali Limited. With this high CCC, the company may be faced with liquidity or expansion issues since the liquid cash available may not be able to pay short-term debts unless inventories are sold or receivables due are paid. This may affect the company in the long-run. Nick Scali has a lower cash conversion cycle which implies that it takes them about 52.83 days to have liquid cash which can help them in meeting short-term liabilities and do other activities.

Recommendations

Increase Payables Period

Increasing payables period without affecting purchases and the relationship with the client will help reduce the conversion cycle and increase profitability (Muscettola 25). This will require negotiations with suppliers which may or may not harm the supplier-client relationship.

Reduce Inventory Period

Reducing inventory period will significantly reduce the cash conversion cycle without affecting suppliers’ relationship with the company and will also improve on liquidity (Ebben, Jay and Alec 381). This can be achieved through adoption of effective and efficient technologies or business operation models. However, investment in such might be expensive but worth it in the long-run. The company should also be careful not to run out of stocks while minimising inventory period.

Reduce Receivable period

The period of receiving cash from debtors should be reduced in order to avail more liquid cash in the business. This will help the company be able to have enough liquid cash, which can be used to do other business associated activities. This will be reflected by an increase in cash ratio.

Capital Gain/Loss of Fantastic Holdings

Current MPS

Previous MPS

Capital gain/loss

November

December

February

  1. Monthly returns on the S&P/ASX 200 index for 12 months period

Monthly Returns Based on S&P/ASX 200 Index For the period ending June 2016

Current Share price

Previous Share price

Capital Gain/Loss

(483.00)

September

November

December

(264.00)

February

(184.00)

(183.00)

  1. Average Monthly Return

Market Index

Average Returns

Average Returns

September

November

December

February

Standard Deviations

Market =
assessment 1 9= 161.87

Fantastic Holding Company=
assessment 1 10=0.178

  1. Risk diversification refers to a situation where one investments in more than one shares in order to reduce portfolio risks (Faccio et al. 3601). In diversification, you should invest in different shares which are independent from each other’s risks. Stocks have different risks measured by standard deviation or variance. Compare between risks and combine stocks that will give a minimum portfolio risk.

  2. Systematic risks are risks which are common among companies and which companies have no control of. Systematic risks are diversifiable, meaning they cannot be diversified or controlled by the company
    and usually affects returns (Bali, et al. 4). According to
    Iqbal, et al. (47), systematic risks changes as stock prices changes and this may cause investors to shy off from investing. Examples of systematic risks include: political instability, go-slows and demonstration of workers. On the other hand, unsystematic risk are risk that are specific to a company and in which a company has direct control or influence. Therefore, unsystematic risk can be minimised through diversifying investment. For instance, the risk level of Fantastic Company on its securities is 17.8%, which is higher compared to its competitors. This high risk of its stocks may be due to reduced earnings of the company due to ineffective business operation, high government taxes or even management problems. According to the Australian Business Review (2016), Fantastic Holdings’ chief executive and another senior officer resigned from office. This is a type of unsystematic risk and can be controlled by the company.

  3. The beta factor of a company represents the systematic risks and measures the volatility of a company’s security compared to the market’s risks. It can also be said that it measure the rate at which a security’s return changes with a percentage change in the market’s risks. For instance, a company with a beta of 1.89 means that the security is positively correlated to the market and it is more volatile. If the return on security in the market drops by 5%, the beta will be as follows:

Beta= 1.89-(0.05× 1.89)= 1.796

References

Bali, Turan G., Stephen J. Brown, and Mustafa Onur Caglayan. «Systematic risk and the cross section of hedge fund returns.» Journal of Financial Economics 106.1 (2012): 114-131.

Ebben, Jay J., and Alec C. Johnson. «Cash conversion cycle management in small firms: Relationships with liquidity, invested capital, and firm performance.» Journal of Small Business & Entrepreneurship 24.3 (2011): 381-396.

Faccio, Mara, Maria-Teresa Marchica, and Roberto Mura. «Large shareholder diversification and corporate risk-taking.» Review of Financial Studies 24.11 (2011): 3601-3641.

Iqbal, Muhammad Junaid, and Syed Zulfiqar Ali Shah. «Determinants of systematic risk.» The Journal of Commerce 4.1 (2012): 47-56.

Muscettola, Marco. «Cash Conversion Cycle and Firm’s Profitability: An Empirical Analysis on a Sample of 4,226 Manufacturing SMEs of Italy.» International Journal of Business and Management 9.5 (2014): 25.

Internet Sources:

Nick Limited: http://hotcopper.com.au/threads/ann-2015-annual-report.2602774/#.V9950612Fe0

Fantastic Holding Company https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&sqi=2&ved=0ahUKEwj3g-WY2pnPAhVIuxQKHc0yCM8QFggiMAE&url=http%3A%2F%2Fwww.fantasticholdings.com.au%2Fmedia%2F122945%2Ffan%2520annual%2520report%25202015.pdf&usg=AFQjCNFemLE5OhiT10hybAeetkaR9olAtA&sig2=VQagKjutQA0yoJIYYM3Ecw

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwjezrW32ZnPAhWGPRQKHV65Bc8QFgg1MAM&url=http%3A%2F%2Fwww.rba.gov.au%2Fstatistics%2Ftables%2Fpdf%2Ff07.pdf&usg=AFQjCNEy_3QFy3Q9KnNLJAZ2v_mAP5V2Gg&sig2=jz-orgUYwfTWiox4SpMx7Q