Thursday,Jul 30 2009, 10:56:29 AMWORKING CAPITAL MANAGEMENT

INTERNAL CONTROL IN RESTAURANT BUSINESS WITH EMPHASIS ON WORKING CAPITAL MANAGEMENT.

 

Working Capital Management is essential in a retail business such as Restaurant Business.

Working Capital refers to the amount of investment in stock, debtors as well as creditors (amount suppliers are willing to grant to the business)

 

Credit Control is of great importance in this kind of business. Credit connotes short term leverage. It refers to a situation whereby a company makes sales for which cash is not wholly collected immediately.

To the seller, credit boost sales, increases market share and profit. To the buyer, credit facilitates that raw materials (stock) could be bought with relative ease and at minimal cost to the business. This ensures production at a steady rate.

 

To promote a good credit control system, there is a need for a credit policy that will state the length of time credit is liquidated (this will depend on the value of credit vis-à-vis the stock turnover period) and has to be strictly complied with to boost suppliers confidence in the business.

 

Reasons for Granting Credit:

-      The level of competition among companies/suppliers.

-      The type of product and quality enhances its bargaining power

-      Relationship with customers/suppliers. A gradual built up relationship and strong financial discipline.

-      Launching new products. The launch of a new product may force the company to grant credit in order to penetrate into the market.

 

Internal Control on Credit

Credit control involves the initial investigation of potential credit customers/suppliers and the continuing control of outstanding accounts. The important issues to note are as follows;

-      New customers/suppliers should give two good references including one from a bank, before being accepted.

-      Credit rating should be done i.e. ability to pay as at when due.

-      Age analysis (Debtors/Creditors) should be reviewed from time to time i.e. monthly.

-      Credit limit should be set for both customer and suppliers. This is done so as not to be over indebted.

-      Personal judgement or favourism should be completely ignored.

 

Debt Collection/Payment

There are three main areas which needs to be considered in connection with debtors/creditors

 - Paper work.

 - Debt collection/Payment

 - Credit control

It is important that sales paper work should be dealt with promptly and accurately.

Invoices should be sent out immediately after delivery.

Checks should be carried out to ensure that invoices are accurate.

Investigation of queries and complaints with regards to credit notes should be treated urgently.

If practical, monthly statement should be issued to customers/suppliers to enhance settlement of bills.

 

It is worthy to note that the use of pre printed letters to remind customers to settle their bills is ineffective. Although it will be more expensive, it is usually better to adopt a more personal approach which include but not limited to the following;

-      Request to payment by telephone

-      Telegram or letter

-      Personal visit by a sales representative

-      Withdrawal of credit facilities

-      Legal proceedings (as a last resort)

 

Stock Control

Stock comprises a very large part of a business working capital and therefore it is very important to control it effectively.

 

Reasons for Holding Stock

-      Transactionary Motive: That is, to meet demand for the stock item. This should be done in a way to avoid stock out.

-      Precautionary Motive: That is, either or both the demand for the stock item or the re-supply is uncertain i.e. because it varies from time to time.

-      Speculative Motive: That is, a decision may be taken to increase current stock position in anticipation of a price rise, so as to make speculative profit.

 

Cost of Holding Stock

The cost of holding stock are as follows;

- Obsolescence: When materials or components become out of date and are no longer required, existing stock must be thrown away and written off as loss to the profit and loss account.

- Deterioration: When materials in store deteriorate to the extent that they are unusable, they must be thrown away (with the likelihood that disposal cost would be incurred).

- Theft and pilferages

- Interest Charges: Holding stock involves the tying up of capital (cash) on which interest charges must be paid.

- Cost of Storage and Store Operations: Stock requires more storage space and possibly extra staff and equipment to control and handle them.

 

Management Accountant and Stock Control

The interest of Management Accountant in stock control is one of cost control. The volume of stock held should be kept at an optimum level which minimizes their cost to the business vis-à-vis enjoying discounts from bulk purchases.

When the demand for a stock item is variable and uncertain, or supply lead times are similarly unknown, uncertainty analysis should be applied to determine the optimum size of safety stocks.