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ABSTRACT


INTRODUCTION


            Telestar Electronics Ltd. is a Hong Kong-based electronics trading company that has been established for 20 years. The company mainly sold electronics parts (transistor, integrated circuit) to manufacturing firms and other trading companies. Telestar started out small, in a few years becoming known in the electronics market and growing into a medium-sized venture. The period from 1990 to 1997 showed rapid business expansion as the firm opens branches in Shenzhen and in Shanghai (China). After 1997, there has been a marked decrease in sales as a recession transpired in Hong Kong. As a result, some of the unsold stocks have been in storage in the warehouses for more than three years and has become ‘dead stock’, which significantly affected Telestar’s cash flow. Moreover, the electronics trader kept many different electronics parts to meet the market requirement, but some of them are not suitable for the target markets.


THE PROBLEM


            The problem identified relates to three concepts of management: inventory management, with specific focus on stock control, information management and theory of free cash flow. As identified above, Telestar apparently needs to better manage their inventory in stock in order to improve cash flow. Stocks are equivalent to money, as obviously, they took money to make. Telestar keeps dead stocks, thus money lying idle when it could be put to better use restricts the cash flow of the company. The lack of a systematic information management between the departments of Telestar contributes largely to worsening the problem that they are facing, as the excellent organisation of inventory data helps decision making processes regarding production easier and more accurate. Information flow from and to the different business units should, as a rule, be smooth to pave way for continuous and hassle-free conduct of business activities.


LITERATURE REVIEW


This literature review focuses on the three above-mentioned concepts of management, namely inventory management, with specific focus on stock control, information management and cash flow management, with emphasis on the theory of free cash flow. Materials from this review came from books, journals, magazines, newspapers, the Internet and other scholarly publications. Every effort will be made to incorporate relevant data from completed studies into the findings to be found in the latter part of the project report. Project participants will be informed that these studies have been reviewed and that redundant input will be kept to a minimum.


Inventory Management. All organisations keep inventory. According to Muller (2003), inventory includes a company’s raw materials (used to produce partial products or completed goods), work in process (Items are considered to be work in process during the time the raw material is being converted into partial products, subassemblies, and finished products), supplies used in operations and finished goods (product ready for current customer sales) and is accompanied by costs which consists of money, space, labour (to receive, check quality, put away, retrieve, select, pack, ship and account for), deterioration, damage, obsolescence and theft. Further according to Muller, inventory costs generally fall into ordering costs and holding costs (2003). Ordering, or acquisition costs, comes about regardless of the value of the goods. On the other hand, holding costs include the cost of capital tied up in inventory (the opportunity cost of money); storage costs such as rent; and costs of handling the product such as equipment, warehouse, and stock-keeping staff, stock losses, wastage, taxes and so on. In just-in-time (JIT) manufacturing environments, inventories are considered as waste. However, in an environment where an organisation suffers from poor cash flow or lack of strong control over electronic information transfer among all business departments and all significant suppliers, keeping an inventory is essential (Muller 2003). The business field has understood for sometime, at least in principle, that sound and careful inventory management is critical to a firm’s strategic viability but one of the most significant developments in the world economy over the last two decades have sharpened the field’s appreciation of that fact (Zipkin 2000). The key factors underlying the extraordinary success of Japanese companies in Western markets seems to be the ability of Japanese firms to operate with substantially lower inventories than their Western counterparts. Thus, inventory has become one of the dimensions upon which companies compete on a global scale.


The problems of inventory management, particularly stock control, are fundamentally alike, each involving some aspects of cost as mentioned above, service and usage. The objective in any given situation is to make that set of decisions which will minimise total costs and provide an acceptable–or economical–level of service at the expected demand or usage rate. The problem is solved on an item basis where it is required that the following information be determined–and continually reviewed–for each item: (1) appropriate costs; (2) expected service level–permissible incidence of stock shortages; (3) forecast of usage.; and (4) replenishment characteristics, e.g., lead time (Dalleck & Fetter 1961). Stock control exists at a crossroad in the activities of a company. Many of the activities (operating efficiency, customer service, low inventory, purchase price reduction, etc.) depend on the correct level of stock being held, but the definition of the term ‘correct level’ varies dependent upon which activity is defining the stock.


According to Wild (2002), stock control is definitely a balancing act between the conflicting requirements of the company and the prime reason for the development of inventory management is to resolve this conflict in the best interest of the business. A contemporary organisation has many sub-units, and each of them will have a particular view of the role stock control. Finance departments, for one, have a problem with stock because it consumes vast amounts of working capital and upsets the cash flow (Wild 2002). One benefit of stock from a financial standpoint is that provisions can be made in case the stocks turn out to be unsaleable, and this vale can be adjusted to modify the profit figure in times of good or bad financial results. However, the existence of these stocks in the first place is detrimental to the firm’s finances. The development of stock control practice has been given impetus by the move toward total quality management (TQM) and JIT concepts. These have focused on the possibility that good management, particularly, is both desirable and profitable, and has brought into question all the attitudes of the different sub-units of a firm as views of stock control. Stock control is a dynamic activity which requires both communication skills and professional inventory techniques. Optimising the balance of stock has been slow and gradual, created by technology, financial need and competitive pressure (Wild 2002).


Information Management.


Cash Flow Management.


Cash flow is simply the money going into a business and out again–cash on hand and/or in a business account that’s used to pay company bills, salaries, and other expenses. Companies that are cash flow negative are simply spending more than their revenues bring in (Mccrea 2002). Cash flow may be viewed as the lifeblood of a corporation and the essence of its very existence (Cook, Hay & Rujoub 1995). Numerous empirical studies that use financial and accounting measures to predict business performance (i.e., success or failure) emphasize the importance of cash flow information in predicting bankrupt and non-bankrupt firms (BarNiv 1990; Carslaw & Mills 1991). If sales vary during the year because of seasonality, growth, or uncertainty, then working capital is difficult to control. The firm’s current assets and liabilities (in particular, receivables, inventory, and short-term payables) change in response to sales fluctuations. As a result, cash flow may sometimes be inadequate to sustain operations, even though profitability is satisfactory over the whole year.


Thompson (1986) stated that evidence suggested that many firms are ill-equipped to make the difficult decisions involved in cash flow management. Poor financial control is a major factor contributing to the demise of many small firms. Inadequate financial control and a lack of cash flow and working capital analysis are often associated with financial difficulties. Perhaps the major danger is a belief by some owners that if profits are adequate, cash flow will take care of itself. A number of studies have found common deficiencies in the management of assets and liabilities, where it revealed inadequate control of receivables, payables, and inventory as well as cash receipts and disbursements.


METHODOLOGY


            The approach


FINDINGS


RECOMMENDATIONS


            Monitor inventory levels. A company’s profitability depends on the successful and timely sale of its products and services. Maintaining inventory levels at less than what is needed to support demand may result in lost sales and delays for customers. On the other hand, excess inventory places a burden on cash resources. Compare inventory turnover with industry norms, and rely on historical sales data and forecasts to set inventory levels Stock sitting on shelves for long periods of time ties up money that could be used for other cash outflows. Sell off outdated, slow-moving merchandise. Donate what can’t be sold. Communicate and manage cash flow strategies. Be sure to inform staff members how they can contribute to improving cash flow and monitor their efforts. If cash is tight, consult with your CPA for more specific strategies on improving the company’s cash flow.



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