Tathagat Varma

Tathagat Varma Session 6/12: 17-Jun-2010

  There might be multiple options, competing for same resources. How do you decide which project is the right one ?

  Questions to answer (Successful Project Management, Young)   Will the proposed project maximize profits ?   Will the proposed project:

o  Maintain market share ? o  Consolidate market share ? o  Open up new markets ?

  Will the project maximize utilization of existing resources ?   Will the project maximize the utilization of existing

manufacturing capacity ?   Will the project boost company image ?   Will the project increase risk faced by the company ?   Is the project scope within company’s current skills and

experience ?

  Successful Project Management, Trevor Young

Factors Weightage Project A Project B Project C

Risk/ uncertainty X%

Complexity Y%

Technology Z%

Past Experience A%

Manufacturing Capability B%

Investment, Capex C%

Opex D%

… %

Weighted Rating

Recommmendation 3rd 1st 2nd

  Typically Financial Models are used:  Return on Investment (ROI)  Return on Net Assets (RONA)  Breakeven and Payback Period  Net Present Value (NPV)   Internal Rate of Return (IRR)  Cost / Benefit Analysis (CBA)   Sensitivity Analysis  Market Data

  Represent cash flows over time

Cash o/f In Year0

Cash o/f In Year1

Cash o/f In Year2

Cash o/f In Year3

Cash o/f In Year4

Cash o/f In Year6

Cash o/f In Year5

Cash i/f In Year2

Cash i/f In Year5

  Invest Rs. 10,000 today and get Rs. 2,000 per year for next 5 years

  Invest Rs. 1,000 today, Rs. 5,000 in year 3 and get Rs. 2,000 per year till year 5 and Rs. 3,000 from then until year 10

  Invest Rs. 10,000 today and get Rs. 700 per year forever

  Invest Rs. 10,000 today and get Rs. 500 per year growing annually at 1% forever

  Four key events:  E0: Buy raw material from vendor  E1: Pay vendor for raw material  E2: Sell finished goods to customer  E3: Collect payment from customer

  How does the timeline look for this ? Why ?

  Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business.   The higher the number, the longer a firm's money is tied up in business

operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.

  A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay.

  It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers. Examples are typically companies that employ Just In Time practices such as Dell, and companies that buy on extended credit terms and sell for cash, such as Tesco. The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.

  Cash Cycle = DSI + DSO – DPO  Days Sales in Inventory (DSI): how many days the

inventory remain in stock before being sold ? o E2 – E1

 Days Sales Outstanding (DSO): time between customer purchase and collection of payment o E3 – E2

 Days Payable Outstanding (DPO): how many days does the firm take to pay to its creditors o E1 – E0

  A kirana shop  Day 1: buys goods on credit from vendor /

distributor  Day 5: sells to customer  Day 7: gets payment from customer  Day 15: pays back to vendor / distributor

  An eatery  Day 1: buys raw material (grocery, vegetables, etc.)  Day 2: sells ‘finished goods’ to customers  Day 2: gets payment from customer  Day 3: pays back to vendor

  A ‘JIT’ manufacturer  Day 1: Gets payment from customer  Day 2: buys raw material  Day 7: ‘sells’ to customer  Day 10: pays for raw material to vendor

  Is such a scenario possible ?