Working capital management of apex food limited

Working capital Management of Apex Food Limited

About Apex Holdings and Apex Food Limite Apex Holdings Limited (AHL) was formed out of necessity as a management company for the management of a wide range of export oriented manufacturing enterprises. The company was formed and registered in Bangladesh in 1998. The sponsors of AHL were running a number of different manufacturing enterprises, ranging from Frozen Foods, Textiles & Apparels, and Specialty Chemicals & Laboratory Testing Services. The sponsors of AHL had setup its first export oriented manufacturing enterprise in 1980 and have ever since grown into a sizable group consisting of five manufacturing enterprises in three broad divisions of Industry. As the number of Companies under the Management increased, the need for a management company to facilitate coordination and to maintain control over the individual company became necessary. Apex Holdings Limited (AHL) was formed as a Management Company for all the companies under the control of AHL sponsors, i.e., the Directors of Apex Holdings Limited have controlling share holdings of all the individual companies.

Apex Food Ltd. Is the subsidiary company of Apex Holding ltd. and is performing remarkably well. It has already achieved number of certificates on which Best Aquaculture certificate and ISO certificate are some of them. It’s main factory is in Chittagong and providing with world class services.

Apex Food Source, a CFIA-registered, HACCP-certified food manufacturer, specializes in the development and production of a variety of foods, including dips, dressings, soups, pastas, sauces, gravies, marinades, bastings, salsas, spice blends, seasonings, salads, processed vegetables and cooked items, to name a few.

Thier core competencies include research, recipe and product development, ingredient sourcing, custom-packaging and merchandising expertise in serving our grocery, foodservice, chain restaurant, wholesale-club, convenience store and institutional clients.

In the later part we will discuss about the Management of Apex Food Ltd.

Liquidity Management of Apex Foods Limited Proper measurement and management of aggregate liquidity position is a matter of concern for Apex Food Limited. We know, firm’s potentially available cash and its potential cash need are called as the firm’s aggregate liquidity position. Apex Food measures and manages their aggregate liquidity position because the amount of current debt relative to current assets affects the level of expected cash flows to shareholders and the risk of these cash flows. Since any variations in the risk and return affect shareholder wealth, assessing and addressing these variations is a necessary function of financial management. Liquidity can be thought as the firm’s ability to quickly generate cash versus the firm’s need for cash on short notice.

Apex Food accomplishes traditional analysis to measure aggregate liquidity position. Commonly cited ratios are current ratio, quick ratio, accounts receivable turnover, inventory turnover ratio.

Current Ratio: This is the ratio of current assets to current liabilities. The higher the ratio, the more liquid the firm is said to be. We have calculated the current ratios of Apex Food from year 2001 to 2010. We see the current ratio has increased from 1.25 in 2001 to 1.69 in 2010, which indicates the firm has become more liquid recently. Current ratio has some problem also. Current ratio mixes assets and liabilities that are, in reality quite different from in terms of their nearness to cash (that is, in their time to maturity). Inventory, which requires a sale to become receivables and the collection of the resulting receivables to become cash, is treated in the same way as marketable securities, which can be sold quickly and thus are clearly more liquid.

Quick ratio: This is also called the “acid test� ratio. Here, inventories (which require a sale to become collectible) are deducted from the current assets account and the result divided by current liabilities. The idea behind the quick ratio is to generate an index that better compares short-term cash generating ability with short-term cash needs by excluding the most obviously illiquid current asset (the one furthest from cash in the working capital cycle) from the near-cash assets total. Quick ratio of Apex Food was 0.32 in 2001, which has increased to 0.67 in 2010 that also indicates increased liquidity.

Accounts Receivable turnover: This ratio is usually calculated as sales divided by accounts receivables. The inverse of this ratio times the number of days in a year gives the average collection period: the weighted-average time that a receivable is outstanding. The higher the turnover (and the lower the average collection period), the quicker is a receivable turned into cash, and the more liquid is the firm said to be. In case of Apex Food accounts receivable turnover increases over year. In 2001 accounts receivable turnover was 80 and 2010 it has become 109. Beside that the average collection period gets lower year by year. In 2001 it was 4.5 and in 2010 it has become 3.3. so we can say liquidity position of Apex Food has got improved. The accounts receivables turn into cash more quickly than previous years.

Inventory Turnover Ratio: This is usually computed as cost of sales divided by inventory. The higher is the turnover, the more liquid is the asset. The inventory turnover ratio of Apex Food gets higher and higher year by year. In 2001 it was 2.22 only. But in 2010 it has been increased to 3.46, that inventory turn into sales more quickly now.

Modern Ratio Though Apex Food has been succeeded to decrease the average collection period and inventory turnover period, but has not been able to increase the payment deferral period to increase the overall liquidity position. Payment deferral period has decreased year by year, but in a slow motion.

The four ratios are easy to understand and are commonly practiced by Apex Food to assess the liquidity of firms. But they may give wrong signals, contradictory signals, or on signals at all of actual changes in liquidity position. So, Apex Food uses some improved indices for measuring aggregate liquidity. Those are: 1). the cash conversion cycle, 2). Comprehensive liquidity index, 3). the net liquid balance, and

4). lambda index.

Traditional 2010 analysis Current 1.69 ratio Quick ratio 0.67

2009

2008

2007

2006

2005

2004

2003

2002

2001

1.42

1.47

1.47

1.44

1.43

1.4

1.37

1.35

1.25

0.49

0.54

0.55

0.46

0.44

0.41

0.39

0.36

0.32

Cash Conversion Cycle We know that when we have to calculate cash conversion cycle we should determine two important elements. They are as follows:1. Operating cycle time 2. Payment deferral period / time First of all we have to calculate operating cycle time. So we have to determine account receivable collection period and inventory processing period.

Here, A/R collection period= 360/ ART (account receivable turnover) Again, Inventory processing period= 360/ ITR (inventory turnover) Payment deferral period/ time= (average A/C payable + other sales related payable/cost of goods sold)*360.

2009

2008

2007

2006

2005

2004

2003

2002

2001

2010 109

189.5

103

100

98

95

93

88

83

80

Inventory turnover

3.46

3.11

3.05

2.93

2.8

2.77

2.61

2.55

2.48

2.22

A/P turnover

459.83

515.45

520

533

538

544

548

553

555

561

A/R turnover

Cash conversion cycle for 2010:1.Operating cycle time: A/R collection period= 360/109 = 3.30 days Inventory processing period= 360/3.46 = 104 days Operating cycle time= (3.30 + 104) days =107.3 days

2.Payment deferral time= (4,323,203 + 153,845,402/1,987,976,139)*360 = 29 days

So, CCC= (107.3 – 29) days = 78.3 days Here we assume that trade creditors payment is account payable. And we also take the selling & administrative cost as sales related cost.

Cash conversion cycle for 2009:Operating cycle time:A/R collection period= 360/189.5 = 1.90 days Inventory processing period= 360/3.11 = 116 days Operating cycle time= (1.90 + 116) days =117.9 days Payment deferral time= (3,208,970 + 127,969,216/ 1,654,088,396)*360 = 28 days So, CCC= (117.9 – 28) days = 89.9 days Cash conversion cycle for 2008:Operating cycle time: A/R collection period= 360/103 = 3.50 days Inventory processing period= 360/3.05 = 118 days Operating cycle time= (3.50 + 118) days = 121.50 days Payment deferral time= (2,550,919 + 120,345,117/ 1,451,998,123)*360 = 30 days

So, CCC= (121.50 – 30) days = 91.50 days Cash conversion cycle for 2007:-

Operating cycle time: A/R collection period= 360/100 = 3.6 days Inventory processing period= 360/2.93 =123 days Operating cycle time= (3.6 + 123) days = 126.6 days Payment deferral time= (1,166,009 + 117,278,543/ 1,321,876,734)*360 =32 days So, CCC= (126.6 – 32) days =94.6 days Cash conversion cycle for 2006:Operating cycle time: A/R collection period= 360/98 =3.7 days Inventory processing period=360/2.8 =129 days Operating cycle time= (129 + 3.7) days = 132.7 days Payment deferral time= (1049302 + 112,507,297/1,129,370,859)*360 =36 days So, CCC= (132.7 – 36) days = 97 days Cash conversion cycle for 2005:Operating cycle time: A/R collection period= 360/95 = 3.8 days Inventory processing period= 360/2.77 =130 days Operating cycle time= (3.8 + 130) days = 133.8 days

Payment deferral time= (950870 + 105,870,650/1,024,670,770)*360 = 38 days So, CCC= (133.8 – 38) days = 96 days Cash conversion cycle for 2004:Operating cycle time: A/R collection period= 360/93 = 3.9 days Inventory processing period= 360/2.61 =138 days Operating cycle time= (3.9 + 138) days = 141.9 days Payment deferral time= (870673 + 103,455,123/845,873,459)*360 = 44 days So, CCC= (138 – 44) days = 94 days Cash conversion cycle for 2003:Operating cycle time: A/R collection period= 360/88 = 4.1 days Inventory processing period= 360/ 2.55 = 141 days Operating cycle time= (4.1 + 141) days = 145.1 days Payment deferral time= (756882 + 89,739,540/782,543,984)*360 = 42 days So, CCC= (145.1 – 42) days = 103.1 days Cash conversion cycle for 2002:Operating cycle time: A/R collection period=360/83

= 4.3 days

Inventory processing period=360/2.48 =145 days Operating cycle time= (4.3 + 145) days = 149 days Payment deferral time= (543903 + 87,367,892/631,278,561)*360 = 50 days So, CCC= (149 – 50) days = 99 days Cash conversion cycle for 2001:Operating cycle time: A/R collection period=360/80 = 4.5 days Inventory processing period=360/2.22 =162 days Operating cycle time= (4.5 +162) days = 166.5 days Payment deferral time= (342987 + 82,789,650/549,650,872)*360 = 54 days So, CCC= (166.5-54) days =112.5 days

2009

2008

2007

2006

2005

2004

2003

2002

2001

ACP

2010 3.3

1.89

3.49

3.6

3.67

3.78

3.87

4.09

4.33

4.5

ICP

104

115.7 5

118

122.8 6

128.5 7

129.9 6

137.9 3

141

145

162

PDP

29

28

30

32

36

38

44

50

54

78.3

89.64

91.49

94.46

96.24

95.74

97.8

42 103.0 9

99.33

112.5

CCC

Overall Recommendation: As the selling and administrative expenses are decreasing day by day the overall cash conversion cycle is also decreasing. Also the total conversion period is remaining at a steady condition year by year. Operating cycle time is also decreasing at a particular rate year by year. Total payment deferral period is also decreased.

Comprehensive Liquidity Index We know, Comprehensive liquidity index= Modified current assets/Modified current liabilities For 2010: Our calculated, accounts receivable turnover=109 times Inventory turnover=3.46 times

Modified Current Assets: Cash & Bank balances

_

Advance,deposits & prepayments

302235767

_

21684194

Other receivable

_

41858012

Trade Debtors 20169720(1-1/109) _

19984677

Inventories 573384439 (1-1/109-1/3.46) _

402405985 ------------------------788168635

Modified Current liabilities = 569295384

CLI= 788168635/569295384 = 1.38 For 2009: ART=189 times IT= 3.11 times

Modified Current Assets:

Cash & Bank balances

_

Advance,deposits & prepayments

_

Other receivable

57404919 _

Trade Debtors 9627220(1-1/189)

138451205

84212591

_

Inventories531786340(1-1/189-1/3.11) _

9576282 357980263 --------------------------------647625260

Modified Current liabilities= 579780667 CLI= 647625260/579780667 = 1.11

For simplicity we do not show the calculation but only the results.

Year

CLI

2008 2007 2006 2005 2004 2003 2002 2001

1.1 1.05 1 0.95 0.67 0.63 0.44 0.38

CLI 1.2 1 0.8 0.6 CLI

0.4 0.2 0

2008 2007 2006 2005 2004 2003 2002 2001 Year

We see that comprehensive liquidity index is increasing year by year. It indicates that firm’s liquidity position is gradually improving year by year.

Lambda Calculation We know, Lambda=Initial reserve + E (NCF)/Uncertainty For 2010: Lambda=302235767+(8559275+339079761)/5000000 =129.97% For 2009:

Lambda= 138451205+(-8930907+310518910)/4000000 =110%

For 2008:

Lambda=195853040+270126812/6000000 =78% For 2007: Lambda= 180564231+251215340/7000000 = 61.68% For 2006: Lambda= 156981432+220416591/7500000

=50% For 2005: Lambda= 142556581+190497600/8000000 =25.59% For 2004: Lambda=135146587+170923728/8500000 =36% For 2003: Lambda=121943565+141715280/9000000

=29.29% For 2002: Lambda= 116643552+112957615/9500000 =24.1 For 2001: Lambda= 110786342+100684251/9900000

=21.36%

Year

LAMBDA

2010

129.00%

2009

110%

2008

78%

2007

50%

2006

62%

2005

25.59%

2004

36%

2003

29.29%

2002

24.17%

2001

21.36%

LAMBDA 140.00% 120.00% 100.00% 80.00%

LAMBDA

60.00% 40.00% 20.00% 0 0 1

0 2

2

0 3

2 0

2 0

0 0 4

0 5

2

2 0

0 6

2 0

0 7

2 0

0 0 8

9

2

0 0

2

2 0

1 0

0.00%

Year

From lambda measure we see that the probability of stock out of cash is increasing year by year for the firm.

Net Liquid Balance Net liquid balance centers on the firm’s balance of cash and marketable securities. The Net Liquid Balance does not view the firm’s investment in accounts receivable and inventory as contributions to aggregate liquidity, but, rather considers them as additional asset to be financed. The accounts payable and accruals that are part of current liabilities are treated not as maturing obligations but as part of the firm’s prepayment financing package. Only notes payables are treated as maturing oblgations.The net Liquid Balance is defined AsNLB = (Cash + Marketable Securities – Notes Payable) / Total Asstes Net Liquid Balance of Apex Food: Apex food is one of the popular companies of Bangladesh. We have got the cash balances of this company. But they does not have any investment in marketable securities and notes payable. That’s why we are calculating NLB by deviding cash by total asset Net Liquid Balance of Apex Food of 2010:

Cash=302235767 Total Asset=1136281000 So, NLB = 302235767/1136281000 = .27 Net Liquid Balance of Apex Food of 2009: Cash=138451205 Total Asset=1012365000 So, NLB = 138451205/1012365000 = .14 Net Liquid Balance of Apex Food of 2008: Cash=195853040 Total Asset=1001696000 So, NLB = 195853040/1001696000 = .2

Net Liquid Balance of Apex Food of 2007: Cash=180564231 Total Asset=932231000 So, NLB = 180564231/932231000 = .19 Net Liquid Balance of Apex Food of 2006: Cash=15681432 Total Asset=923389000 So, NLB = 1568132/923389000 = .17 Net Liquid Balance of Apex Food of 2005:

Cash=142556581 Total Asset=877221000 So, NLB = 142556581/877221000 = ..16 Net Liquid Balance of Apex Food of 2004: Cash=135146587 Total Asset=833361000 So, NLB = 135146587/833361000 = .16

Net Liquid Balance of Apex Food of 2003: Cash=121943565 Total Asset=791693000 So, NLB = 121943565/791693000 = .15 Net Liquid Balance of Apex Food of 2002: Cash=116643552 Total Asset=752110000 So, NLB = 116643552/752110000 = .16 Net Liquid Balance of Apex Food of 2001: Cash=110786342 Total Asset=714505000 So, NLB = 110786342/714505000 = .14

Year

NLB

2010

0.27

2009

0.14

2008

0.2

2007

0.19

2006

0.17

2005

0.16

2004

0.16

2003

0.15

2002

0.16

2001

0.14

NLB 0.3 0.25 0.2 0.15 NLB

0.1 0.05 0

2010

2008

2006

2004

2002

Year Overall analysis: If NLB is negative it indicates the firm is depended on outside financing. If NLB is positive then better for the firm. If negative higher the negativity higher the risk higher outside dependability. Here all NLB values are positive. Values are increasing with year. So, we can say the firm does not have much risk of depending on outside financing.

Summary The report is based on the working capital management of our assigned company APEX FOOD. We know, firm’s potentially available cash and its potential cash need are called as the firm’s aggregate liquidity position. Apex Food measures and manages their aggregate liquidity position because the amount of current debt relative to current assets affects the level of expected cash flows to

shareholders and the risk of these cash flows. The overall working capital position is also similar to the cash flows which means that all the working capital needs will meet by that cash position.

Conclusion The report is based on the working capital management of our assigned company APEX FOOD. We know, firm’s potentially available cash and its potential cash need are called as the firm’s aggregate liquidity position. Apex Food measures and manages their aggregate liquidity position because the amount of current debt relative to current assets affects the level of expected cash flows to shareholders and the risk of these cash flows.