Horton Building Supplies Assi 2 Complete

HORTON BUILDING SUPPLIES Final Project

PRESENTED TO:

PROFESSOR EESHAH TARIQ GROUP MEMBERS: A TIF ARIF

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#AIN LATIF  $AFFER % HALID HALID M& #EESHAN 'OUNUS (OURSE: FINAN(IAL ANAL'SIS DATE:

9TH JANUARY , 2014

HORTON  B UILDING S UPPLIES - WORKING CAPITAL INTRODUCTION Horton B)il*in+ S),,lie- .HBS/ i- a co,an locate* in Mill-2a)+3 (o)nt locate* a 4e5 ile- -o)t3 o4 %an-a- (it& 6it3 o,,ort)nit t3at aro)-e 4ro %an-a- Ne2ra-7a Act in 189; T3oa- Horton .a lan*=e +eneration- an* all t3e i,ortant ,o-ition iocc),ie* 2 a 4ail e2er& Since; t3e co,an -ale- are -ea-onal; t3e co,an -lo5- *o5n in col*er ont3-& $an)ar i- re+ar*e* a- t3e lo5 ,oint o4 t3e ear an* t3en t3e -ale- -tart- to 2)il*& La2or i- e,loe* in ,ea7 -ea-on&

ISSUES WITH HORTON BUILDING SUPPLIES One o4 t3e o-t i,ortant or critical a-,ect o4 t3e co,an i- t3at t3e )-e- t3e con-er=ati=e a,,roac3 4or t3e 5or7in+ ca,ital ana+eent& H)+e ca-3 i- ,ile* in t3e o@r& T3e re-)lt o4 t3e )arter ca-3 ?o5- -3o5- t3at t3e >r- ca-3 ?o5 i- in=er-el relate* to t3e -ea-onalit o4 t3e 2)-ine--& T3at i-; t3e >r- ca-3 ?o5 increa-e- *)rin+ o@< ,ea7 )arter- an* *ecrea-e *)rin+ ,ea7 tie-&

Q2 "or#ing Ca$ital = Acco%nt &eceiva'les + Inventory – Acco%nts Paya'le 199 I$%&$'()* A//($' R&/&+%".& A//($' P"*".& W()5+$ C"6+'".

Q")'&) 1  1;10&"

Q")'&) 2  1;8&

Q")'&) 3  1;&!

Q")'&) 4 1;"0!&1

 1;00"&!

 !;!1"&

 1;!&"

 1;""8&8

 9&

 1"&"

 8&

 "0&

 !;019&

 !;&!

 !;"0&8

 !;""&9

Q3 !"# Fir- -ea-onal 5or7in+ ca,ital Sea-onal 5or7in+ ca,ital i- t3e *i@erence o4 5or7in+ ca,ital at ,ea7 tie- an* ,eranent 5or7in+ ca,ital& In t3i- ca-e in )arter ! t3e >r o,eration at ,ea7 an* in )arter  t3e >r- o,eration- at t3e lo5 ,oint& Hence

(easonal )or#ing ca$ital = *%arter  )or#ing ca$ital – *%arter 4 )or#ing ca$ita l (easonal )or#ing ca$ital = 99. – !!., = -!.7

!# Fir- ,eranent 5or7in+ ca,ital 6or7in+ ca,ital at t3e lo5 ,oint o4 o,eration; 53ic3 4or t3e o-t co,anie- iDece2er; +i=e- an e-tiate o4 t3e >r- ,eranent 5or7in+ ca,ital& In t3i- ca-e 5or7in+ ca,ital o4 )arter  5ill 2e t3e ,eranent 5or7in+ ca,ital& Hence; Permanent )or#ing ca$ital = *%arter 4 )or#ing ca$ital = -!!.,

Q4 (a-3 ccle i- *e>ne* a- t3e tie 2et5een ca-3 *i-2)r-eent an* ca-3 collection& 63en *e>nin+ ca-3 ccle in ter- o4 5or7in+ ca,ital ana+eent it i- -3o5n ao,eratin+ ccle le-- acco)nt- ,aa2le ,erio*& 63en 5e nee* to co,are t3e ca-3 ccle o4 a retailer li7e HBS an* t3at o4 in-)rance -er=ice; t3en it i- o2=io)- t3at a retailer 5o)l* 3a=e a lon+er ca-3 ccle& (a-3 ccle i- calc)late* a-: Cash Cycle = Inventory Period + Average Collection Period – Average Payment Period It i- clear 4ro t3e e)ation t3at ca-3 ccle i- calc)late* t3ro)+3 t3e in=ol=eent o4  in=entor; acco)nt recei=a2le- an* acco)nt- ,aa2le& A retailer can 3a=e =arie* ao)nt- o4 in=entor le=el; acco)nt- recei=a2le- an* acco)nt- ,aa2le& A retailer li7e HBS ,riaril 4oc)-e- on t3e >e* a--et-; 3ence t3e are ca,ital inten-i=e& Fie* a--et- li7e lan*; 2)il*in+ an* 5are3o)-e- are )-e* to contin)e t3eir o,eration-& In or*er to contin)e t3eir *ail o,eration-; t3e *e-er=e t3e +reate-t attention 53en it coe- to 5or7in+ ca,ital anal-i-& On contraril; -er=ice- -ector 5o)l* 3a=e a -3orter ca-3 ccle; a- t3ere are 4e5er or no in=entor le=el-; acco)nt recei=a2le- are le-- a- co,are* to a retailin+ 2)-ine-an* acco)nt- ,aa2le 5o)l* 2e o4 ini) le=el&

Q 199 C"7 A//($' R&/&+%".& I$%&$'()*

Q")'&) 1  1;!10&!

Q")'&) 2  19&"

Q")'&) 3  8!0&0

Q")'&) 4  1;!9&8

 1;00"&!

 !;!1"&

 1;!&"

 1;""8&8

 1;10&"

 1;8&

 1;&!

 1;"0!&1

 T3e (a-3 2alance o4 t3e co,an -3o5- an in=er-e relation 5it3 -ea-onalit o4 t3e 2)-ine--& Fro t3e a2o=e ta2le; 5e can clearl -ee t3at *)rin+ t3e !n* an* "r* )arter-; ca-3 2alance i- re*)ce* an* t3e recei=a2le- are increa-e*& 63ile; in o@< -ea-on t3e re-)lt- are =ice =er-a& I4 t3e co,an 5ant to ,rocee* 4or t3e loan to 3an*le t3eir 5or7in+ ca,ital t3en Acco)nt Recei=a2le- 5o)l* 2e t3e ajor rea-on rat3er t3an in=entor&

D)e to lon+er collection ,erio* in ,ea7 -ea-on; a re)ire t3e co,an to +o 4or loan a- t3e ca-3 re-o)rce- arent eno)+3& Ne=ert3ele--; i4 t3e co,an 5ant to i+nore +oin+ 4or loan t3en t3e nee* to re*)ce t3e a=era+e collection ,erio* to rai-e t3e le=el o4 ca-3&

Q8  T3e >r- ,eranent 5or7in+ ca,ital 5ill re*)ce 2 ti+3ten t3e collection ,roce*)re-& T3e ti+3ten collection ,roce*)re- re-)lt- in lo5er acco)nt recei=a2leao)nt 53ic3 in re-)lt lo5er t3e ,eranent 5or7in+ ca,ital& "or#ing ca$ital $ermanent = "CP = &eceiva'les + Inventory – Acco%nt Paya'le 63en ti+3ten t3e collection ,roce*)re"or#ing ca$ital $ermanent = "CPA = &eceiva'les red%ce/ + Inventory – Acco%nt  Paya'le Hence; "CP "CPA Sea-onal 5or7in+ ca,ital i- alo-t ine@ecti=e 2 ti+3ter collection ,roce*)re2eca)-e 5or7in+ ca,ital o4 2ot3 ,ea7 an* lo5 o,eration ,oint- 5ill re*)ce accor*in+l an* t3e *i@erence 2et5een 2ot3 reain t3e -ae& (easonal )or#ing ca$ital ("C = )or#ing ca$ital at $ea# o$eration $oint – )or#ing ca$ital at lo) o$eration  $oint   63en ti+3ten t3e collection ,roce*)re(easonal )or#ing ca$ital ("CA = )or#ing ca$ital at $ea# o$eration $oint red%ce/ – )or#ing ca$ital at  lo) o$eration $oint red%ce/ 6or7in+ ca,ital o4 2ot3 ,ea7 an* lo5 o,eration ,oint- 5ill re*)ce accor*in+l an* t3e *i@erence 2et5een 2ot3 reain t3e -ae .alo-t e)al; not c3an+e to +reat etent/& ("C = ("CA

Q  T3e co,an 3a- =er )c3 ca-3 in 3an*& In ,ea7 -ea-on- t3e co,an 4ace- t3e re*)ction in ca-3 2)t -till t3e 3a=e eno)+3 ca-3 in 3an* to aintain t3e 5or7in+ ca,ital; -o t3e co,an *oe-nt nee* an -3ort ter *e2t to >nance t3e 5or7in+ ca,ital& B)t i4 t3e co,an 5ant- to e,an* it- 2)-ine--; t3e nee* -3ort ter *e2t to >nance all t3e co,an 5or7in+ ca,ital& So t3e ar+)ent o4 $ane Horton Jall t3e

5or7in+ ca,ital nee*- to )-e -3ort ter *e2tK 5ill 2e a,,lica2le i4 t3e 2)-ine-- i- in e,an-ion o*e&

Q: !"# A%"$'"& (; C($&)%"'+%& "66)("/7< 1& E,en-e- can 2e ea-il co=ere* 5it3 t3e lar+e 2alance o4 ca-3 a=aila2le 5it3 t3e co,an& No nee* to +et >nancin+ 4acilitie- 4ro eternal -o)rce-& !& Acco)nt recei=a2le- are +i=en lar+er ,aent ,erio* to re,a t3e ao)nt&  T3i- re-)lt- an increa-e in -ale- re=en)e 4or t3e ten)re& Sale- 5o)l* +et etra 2oo& "& In=entor i- al-o 7e,t 3i+3; 53ic3 ean- t3at c)-toer- are a2le to +et 53at t3e 3a=e *ean*e* 4or& Hi+3er le=el o4 in=entor a7e- c)-toer 3a,,&

D+"%"$'"& (; C($&)%"'+%& A66)("/7< 1& Hi+3 le=el o4 collection ,erio* re-)lt- in 3i+3 le=el o4 2a* *e2t-& !& (a-3 a=aila2le co)l* 2e in=e-te* an* +et an etra incoe 4or t3e co,an& "& In=entor co)l* +et o2-olete an* a =)lnera2le to nat)ral an* )ncontrolla2le *i-a-ter&

!# 'e-; 3e can re*)ce t3e le=el o4 ca-3 53ic3 3e 3ol*- to at lea-t !90;000& In E3i2it  in )arter 1 53ic3 i- lo5 o,eratin+ ,oint t3e ca-3 i- 1!10&! an* in )arter ! 53ic3 i- t3e ,ea7 o,eratin+ ,oint t3e ca-3 i- 19&"& T3e ca-3 re*)ce2et5een )arter 1 an* ! i- 90 53ic3 -3o5- t3at t3e >r )tilie- t3e ca-3 53en it i- nee*e*&

Q9  T3e at)rit atc3in+ ,rinci,le -tate- t3at -3ortnance* 5it3 -3ortnancin+ an* lon+ll t3e nee* o4 -ea-onal 5or7in+ ca,ital t3en t3e -3o)l* +o 4or ta7in+ -3ort