“How Operating Cash Cycle and Working Capital Cycle can influence Business and our Personal Life” (Business report for two giant tobacco companies).

Efficient operation in every business is crucial. Especially when is about controlling the cash, assets, liabilities etc, of a company. Because all the model and theories in the business world begun from humans experiences, let’s see an example from our daily, personal life that will state the important of OCC and WCC. For example: “imagine a man who lives on his own, his name is Bob and his working as a sales assistant in a retail company with the salary of £1500 net income. Bob has to arrange to pay all of his bills with that amount of money which is his income and if he still has the money go for a trip on the weekend. Bob paying £300 for the apartment rent, £200 for internet, electricity etc, £200 for foods and home goods. Bob still has £800 to spend until the end of the month, but he buys a ticket to go to Amsterdam from London for another £60 and another £40 for his accommodation. He is thinking that he has another £700 to spend but is still the middle of the month. He spending another  £500 because he has a really good time and he says that he is staying home for the rest of the month so he can have as much fun in his weekend in Amsterdam. Bob vacation finish and he go home with £200 and he found out that his car has engine issues and he has to fix it. The car needs £200 to be fixed but Bob has that money to live for the rest of the month. Bob is in a difficult situation because without a car he cannot go work. Bob next options are to sell some of his assets so he can have money to pay for the car and money to spend the rest of the month.” Manage our receiving and payment is important even for us, in our personal life, Bob now must sell his PlayStation to have money for the car. Who wants to sell his PlayStation for fixing the car?

For example: “imagine a man who lives on his own, his name is Bob and his working as a sales assistant in a retail company with the salary of £1500 net income. Bob has to arrange to pay all of his bills with that amount of money which is his income and if he still has the money go for a trip on the weekend. Bob paying £300 for the apartment rent, £200 for internet, electricity etc, £200 for foods and home goods. Bob still has £800 to spend until the end of the month, but he buys a ticket to go to Amsterdam from London for another £60 and another £40 for his accommodation. He is thinking that he has another £700 to spend but is still the middle of the month. He spending another  £500 because he has a really good time and he says that he is staying home for the rest of the month so he can have as much fun in his weekend in Amsterdam. Bob vacation finish and he go home with £200 and he found out that his car has engine issues and he has to fix it. The car needs £200 to be fixed but Bob has that money to live for the rest of the month. Bob is in a difficult situation because without a car he cannot go work. Bob next options are to sell some of his assets so he can have money to pay for the car and money to spend the rest of the month.” Manage our receiving and payment is important even for us, in our personal life, Bob now must sell his PlayStation to have money for the car. Who wants to sell his PlayStation for fixing the car?

Now that you understand the general concept of OCC and WC let’s analyze those two models in a more depth. Our report is going to analyze the theories of Operating Cash Cycle (OCC) and Working Capital (WC) with two main tobacco companies and compare them.  After a statistic research, 967 millions of people are smoking at a daily base and the main leader of the tobacco industry is British American Tobacco (BAT). But they also have a competitor that is trying to be the leader in tobacco market which is the Imperial Tobacco.  Finally, we will recommend some helpful ways how these companies can improve their OCC.

Working capital management could be defining as a calculation of current assets minus current liability. This means that working capital is affected by the balance of C.A. and C.L.  If these two elements have a significant difference between them, WC will affect the firm negatively. That’s why they should keep them at a standard level for better operation of the firm (Khan, 2004). Current assets are determined by cash that firm has on hand or in the bank and also from the trade receivables and based on their inventories. That is the main aspect that is determined the performance of current assets. Current liability, on the other hand, is determined by the trade payables and the bank overdraft of the firm (McLaney and Atrill, 2012).  Also, WC its split into two segments, grosses working capital and net working capital. Gross working capital it’s the total of the current asset. Net working capital it’s the difference between C.A. and C.L. For example, if a firm cannot keep C.A. and C.L. at a stable balance, they will face a problem with the operation of the firm.

Franchise_Accountants_graphic.jpg

To conclude with, the working capital at the above layout it’s the process that working capital management should keep in balance for the better performance of the firm. For example, if Bob does not pay the car engine issues, the cycle will have a problem paying the mechanism because the cycle will not continue. Bob will not have cash and as a result, the cycle of working capital will have a difficult to process and Bob must sell his PlayStation. That’s why Bob should manage his receiving cash because if something cannot proceed, then the cycle will stop operating and Bob will not have enough money to live (Bhattacharya, 2009).

Operating Cash Cycle is important for every business that has to do with the purchase and received. OCC is the cycle that every firm follows to purchase their goods and then receive credits from those goods (Atrill, et al., 2011). But there are firms that are using wrong this cycle and they end up in bankruptcy. For example, a fruit market is selling apples that buy from their supplier. If they buy more apples that they sell they will have a problem with the operating cycle because they will give more than they will receive. The customer would not buy the old apple so they have to buy new and the money that they spend for old ones will be wasted. Finally, if the fruit market continues like this, it would lead to receiving less than they purchase (Quiry, et al., 2011). Operating cash cycle splits into two parts, the part of the operation cycle and the part of cash cycle. Operation cycle is the process to purchase the raw material, then to elaborate it, finish the product and finally, they can sell it and receive cash. Cash cycle is the process of purchasing raw material and receives from the product. Finally, OCC is the whole operation that a firm follows to produce, sell and receive. To follow the cycle correctly they should do the necessary calculation for best performance of the company (Sheeba, 2010).

2079_Operating Cash Cycle Homework Help.jpg

British American Tobacco (BAT) which sells tobacco worldwide was founded at 1902 and since then, they raise their value for customers year to year. After a survey at the USA more than 480,000 deaths, per year are responsible for smoking and people keep smoking. BAT tries to provide as much responsibility to people who are smoking (CDC, 2014). They don’t produce their tobacco, so this means, they have suppliers to get their tobacco. That operation needs an effective process of the OCC because it’s important for such a big company to have a correct process with their suppliers. For example, if they order more tobacco than they need and do not sell all these tobacco they will lose a lot of money. That could affect a firm like BAT because is a business of millions and there is no room for any mistake. A statistic research shows at 2012, 967 millions of people smoke daily, this research shows that the customers are there and it’s up to the company to keep its WC at a balance because they should be appropriate to what customers want (BBC, 2014). The calculation of OCC of the year 2013 shows the amount of -517 days. That shows how effective operation they have because minus mean that they receive much more than they produce (British American Tobacco, 2015).

Comparing BAT between Imperial Tobacco, which are the main competitors at tobacco manufacture. As we can see from the appendices their cost of sales was exactly the same. But OCC was having a big difference, but also Imperial Tobacco was having effectively and successful OCC amount. Imperial Tobacco OCC amount was -30 which it’s still a good operation of the OCC but as we can see, if we compare those two companies which are the main leader at tobacco manufacturing BAT has a significant difference. BAT has the better operation than Imperial Tobacco and this means that WC is also better than BAT because of the OCC (Imperial Tobacco, 2015).

c

As we can see from our chart, the company with better OCC also has better WC. In our case BAT which has a significant difference with Imperial Tobacco on their OCC, BAT WC also it’s better than their competitors. That proved us, how much important is the operation of the firm and how it affected the different aspect of the firm. In our case which BAT has a better operation from their competitors, they could have the flexibility to reduce the risk of non-payment for a period of time and this could be an advantage from their competitors. That’s why operation cycle affects the whole company and could help them to be a step forward from their competitors.

To conclude with, OCC it’s important to model for every firm that has to do with purchasing and receiving. As better the OCC is, the better the whole firm is going. With good performance of the OCC then WC also has a positive outcome and finally the income of the whole firm is at a positive stage.

Bibliography

1. Khan, M, 2004. Financial Management: Text, Problems, And Cases. 4th ed. New             Delhi: Tata McGraw-Hill Education.

2. Khan, M.Y., and Jain, P.K., 2005. Basic Financial Management. 2nd ed. New            Delhi: Tata McGraw-Hill Education.

3. Bhattacharya, H, 2009. Working Capital Management: Strategies and        Techniques. 2nd ed. New Delhi: PHI Learning Pvt. Ltd. 4. Sheeba, K, 2011. Financial Management. 1st ed. India: Pearson Education India. 5. CDC – Fact Sheet – Fast Facts – Smoking & Tobacco Use. 2015. CDC – Fact                Sheet – Fast Facts – Smoking & Tobacco Use. [ONLINE]

4. Sheeba, K, 2011. Financial Management. 1st ed. India: Pearson Education India. 5. CDC – Fact Sheet – Fast Facts – Smoking & Tobacco Use. 2015. CDC – Fact                Sheet – Fast Facts – Smoking & Tobacco Use. [ONLINE]

5. CDC – Fact Sheet – Fast Facts – Smoking & Tobacco Use. 2015. CDC – Fact                Sheet – Fast Facts – Smoking & Tobacco Use. [ONLINE] Available at: http://www.cdc.gov/tobacco/data_statistics/fact_sheets/fast_facts/. [Accessed  07 April 2015]. 6. British American Tobacco – British American Tobacco. 2015. British American          Tobacco – British American Tobacco. [ONLINE]

6. British American Tobacco – British American Tobacco. 2015. British American          Tobacco – British American Tobacco. [ONLINE] Available at: http://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO89KH EK?opendocument. [Accessed 07 April 2015]. 7. Imperial Tobacco Group PLC. 2015. Imperial Tobacco Group PLC. [ONLINE]          Available

7. Imperial Tobacco Group PLC. 2015. Imperial Tobacco Group PLC. [ONLINE]          Available at http://www.imperial-tobacco.com/ . [Accessed 07 April 2015]. 8. Peter Atrill, Eddie McLaney, David Harvey, Maurice Jenner, a, 2011.

8. Peter Atrill, Eddie McLaney, David Harvey, Maurice Jenner, a, 2011. Accounting an introduction. 5th ed. Australia: Pearson Higher Education AU.Quiry, P., Le           Fur, Y., Salvi, A., Dallocchio, M., Vernimmen, P., 2011. Corporate Finance:           Theory and Practice. 3rd ed. U.K.: John Wiley & Sons.

9. Atrill, P., McLaney, E., Harvey, D., Jenner, M., 2011. Accounting an introduction.            5th ed. Australia: Pearson Higher Education AU.