A Study On The Liquidity Risk Of The Food Manufacturing Companies Finance Essay

This research proposal surveies on the liquidness hazard of the fabrication companies. The complete liquidness ratios analysis are used can assist bring out failings in the fiscal place of companies. The theoretical model such as hard currency flow prediction, fiscal ratio analysis, and appraisal of support installations will used to mensurating liquidness hazard of the fabrication companies.

1.1 Aims:

1. ) To look into the methods of mensurating liquidness hazard of the nutrient fabrication companies.

2. ) To look into the manner to pull off liquidness hazard of the nutrient fabrication company.

3. ) To analyse the fiscal feature among nutrient fabrication companies.

1.2 Research inquiry:

1. ) What are the methods in mensurating liquidness hazard of the nutrient fabrication companies?

2. ) What methods to pull off liquidness hazard of the nutrient fabrication companies?

3. ) What are the fiscal features that affect liquidness hazard among nutrient fabrication companies?

2.0 Introduction:

Liquidity hazard is the hazard that an industry will hold unequal financess to run into its fiscal committednesss in a timely mode. The two elements of liquidness hazard are short term hard currency flow hazard and long term support hazard. The long term support hazard includes the hazard that loans may non be available when the industry requires industry or that such fund will non be available for the needed term or at acceptable cost. Nowadays, liquidness hazard it ‘s non merely for Bankss. While many concerns would now be really well-known with hard currency flow hazard, consciousness of long-run support hazards is besides of import. An inability to pull off either constituent of liquidness hazard may rise the opportunities of the industry going bankrupt ( Accountants today, 2010 ) . This is including fabricating companies as good.

Liquidity is dynamic and can alter harmonizing to both industry and market place conditions. They will give rise to the demand to guarantee equal liquidness to cover all events. The beginnings of liquidness hazard include seasonal fluctuations, unplanned decrease in gross, concern break, unplanned capital outgo, maturating of funding installations, and unequal or non-existent funding installations.

Liquidity hazard is the current and prospective hazard to net incomes or capital arising from a bank ‘s inability to run into its duties when they come due without incurring unacceptable losingss. Liquidity hazard includes the inability to pull off unplanned lessenings or alterations in support beginnings. Liquidity hazard besides arises from the failure to acknowledge or turn to alterations in market conditions that affect the ability to neutralize assets quickly and with little loss in value ( Tiwari, 2009 ) .

Significance of survey:

Basically, this survey aims to happening out the liquidness hazard of the fabrication companies and aid in investigates to pull off liquidness hazard in fabricating company. The survey would besides lend to the more apprehension of the fiscal public presentation of the fabrication company. Based on some comptrollers magazine, where a fabrication concern has sufficient liquidness, there is besides the chance of improved profitableness through reduced involvement disbursal or increased involvement income ( CPA, 2010 ) . Besides that, the fabrication company together with better fiscal snap to negociate improved footings with providers and moneymans or peculiar in new concern chances.

Literature reappraisal:

Harmonizing to article contributed by CPA Australia ( 2010 ) , there were three methods used to mensurate liquidness hazard such as hard currency flow prediction, fiscal ratio analysis and appraisal of support installations in fabricating company. If the fabrication company was enduring such as hard currency flow crisis, event that industry and market status remain unstable the short term liquidness component hazard should be considered.The hard currency flow prognosis will enable to guarantee hold sufficient hard currency flow before return on any fiscal committedness, place any possible hard currency deficit and to see when the job occur and screen them out in progress. For illustration, if the company has big day-to-day hard currency flow volume dealing, so day-to-day hard currency flow prediction is may be best suited ( CPA, 2010 ) . Furthermore, method that step liquidness hazards were fiscal ratio analysis can be used to place cardinal countries of company liquidness hazard. There were indexs of operating hard currency flow, liquidness ratio and fiscal strength. The operating hard currency flow ensures quality of industry earning and used this to bring forth hard currency running operation.These indexs besides used involvement disbursal of short term ability to serve debt and the ratio of debt to gross hard currency flow. These indicate how many old ages of hard currency flow would be required to refund all debt for industry that can mensurate liquidness hazard. Liquidity ratios were step that indicates an industry is ability to refund short term debt and estimate a steadfast liquidness. Which may be utile in measuring liquidness include speedy ratio, current ratio, and per centum of current liabilities. Using these ratios was of import to reflect on the value for both stock and debitors of the industry ( CPA, 2010 ) . For illustration, if the industry has a big sum of unsaleable stock or uncollectable debitor ‘s financess, so the ratios may necessitate to utilize adjusted figures to return this ( CPA, 2010 ) . Besides that, fiscal strength were appropriate ratio of debt to equity will depend on the type of industry and the nature of operations and gross quality consistence and dependability was a critical factor in finding an appropriate degree of pitching. At the same clip, method that appraisal of support installations include the extent the industryrelies on fiscal installations, extent the industry relies on merely one loaner, handiness of financess in utmost crisis conditions and position of fiscal installations committed or uncommitted. There were the cardinal countries to measure the liquidness hazard of the fabrication companies.

If the nutrient industry autumn within minimisation of minutess costs, production smoothing and stock out hazard ( winker and Maccini, 1991 ) . Food industry may alter from one types of green goods to another bring forthing and finished merchandise. The industry may keep hard currency if the hard currency required to payments and fixed minutess cost must be incurred when neutralizing other assets ( Tsiang, 1969 ) . If goods or hard currency are independently distributed overtime, it is optimum for industry confronting fixed minutess costs to reorder stock lists ( Mosser, 1991 ) . Besides that, nutrient industry must make up one’s mind non merely how much to bring forth and besides make up one’s mind how much to stock. Food industry might to be cut downing production costs by equalising end product overtime. The seasonal would every bit ensue in stock list accretion ( Miron and Zeldes, 1988 ) . In peculiar, nutrient industry processing sector clasp less stock list because nutrient merchandise are in general more perishable ( Schwartz and Whitcomb, 1979 ) . That might be presuming the cost of capital to all industry from twelvemonth to twelvemonth as involvement rates adjust. The industry may besides differ to entree to external finance for working capital, viz. overdraft installations and supplier recognition.

Methods to pull off liquidness hazard of the industry were hard currency flow prediction, optimising working capital, funding installations and liquidness buffer. A hard currency flow prognosis can be priceless concern tool if it was used efficaciously in industry ( Mind Tools, 1995 ) . It helpful to alter the figures depending in activity of gross revenues, purchases and staff costs in industry operation. Forecast will besides impact statute law, involvement rates and revenue enhancement alterations of the industry ( Sahara, 2010 ) . For those responsible for pull offing hard currency flow must hold ready and timely entree to indispensable information. Accurate hard currency flow prognosis make certain industry can achieve steady growing without overtrading. Sensitivity instance to take on industry will consequence on sufficient hard currency in industry activity and unexpected deficit in hard currency. Cash flow prognosis may consolidate job every bit shortly as possible and may enable to maintain staff, providers and clients happy.For illustration, predicted hard currency degrees come near to your overdraft bounds, this should warning signals and trigger action to convey hard currency back to an acceptable degree ( Business gateway, 2009 ) . Nestle ( Malaysia ) Berhad group proctors and maintains a degree of hard currency and hard currency equivalents and bank recognition lines deemed equal by direction to finance the Group is operations and to extenuate the consequence of fluctuation in hard currency flows. While, F & A ; N Company adopts a prudent attack to pull offing liquidness hazard and maintains sufficient hard currency.

Furthermore, methods to pull off liquidness hazard that optimising working capital responsible for monitoring and coverage. Cash flow was of import communicate throughout the industry and a hard currency realisation it was because promote all staff who spend and collect hard currency. A worker who responsible for pull offing hard currency demand understand all industry operation and qui vive of seasonal influenced that may do fluctuations in demand for working capital.The industry might be used hard currency flow calculating together with direction fiscal ratios such as ratios of yearss debitors, yearss creditors and yearss stock volitions implement of working capital. Spritzer Berhad pattern prudent liquidness hazard direction to minimise the mismatch of fiscal assets and liabilities and to keep sufficient recognition installations for contingent support demand of working capital ( Spritzer, 2009 ) .

In add-on, methods to pull off liquidness hazard was financing installations that define a type of private funding available and offers assorted types of coverage to both single and establishments. In the fabrication company may be sing different conditions and costs with different funding for get loan, external support and equity. That must be keeping close relationships with bankers and maintaining them both fiscal and operational information of the industry ( Donald H, 2009 ) . Besides that, possible support demand will help in guaranting that loan will be available to run into eventualities when required. For Dutch lady company, they manages liquidness hazard with general banking installations to minimise the difference of fiscal assets and liabilities to keep sufficient recognition installations for contingent support demand of working capital ( Dutch lady, 2009 ) . While, F & A ; N Company maintains sedimentations and have available happening through diverse beginnings of committed and uncommitted recognition installations from assorted Bankss ( FN, 2009 ) .

Similarly, methods to pull off liquidness hazard is utilizing liquidness buffer. For fabricating company that experience habitue or big hard currency flow fluctuations, they should see keeping a liquidness buffer of high quality liquid assets. For illustration, sell down their place in concern or trail up debts with more dynamism ( concern times, 2010 ) .

Basically, analyze the fiscal features between Dutch lady milk industries Berhad, Fraser and Neave Holdings Berhad ( F & A ; N ) , Nestle ( Malaysia ) Berhad and Spritzer Berhad toward liquidness hazard are utilizing liquidness ratio. The liquidness ratio based on past public presentation on the company with the one-year study. Theoretically, liquidness ratios indicate the easiness of turning assets into hard currency as well it indicates how capable a concern in meeting of its short-run duties. A complete liquidness ratio analysis can assist bring out failings in the fiscal place of your concern. This can be referred to as comparative analysis.

The current ratio is the ratio of current assets to current liabilities. This ratio more widely used to do the analysis for short term fiscal place. The current assets used to fund daily operation and pay on-going disbursals include stock list, receivables and prepayments, hard currency and hard currency equivalents and sum owing by related companies. The current liabilities include payables and accumulations, revenue enhancement, loans and adoptions and engage purchase payables. Current ratio for twelvemonth 2009 of Dutch lady milk industries Berhad is 2:1 times and Fraser and Neave Holdings Berhad ( F & A ; N ) is 1.5:1 times, Nestle ( Malaysia ) Berhad is 1.08:1 times, and Spritzer Berhad is 2.44:1 times. The current ratios were slightly low at Nestle Company. It is because rule of Nestle is an investing keeping company of the high bank overdraft comparison than other company but bank recognition lines deemed equal ( Nestle, 2009 ) . For illustration, fabricating industries may keep a current ratio 2:1 in order to stay solvent during downswing.

Quick ratio specifies whether current assets that could be fast converted into hard currency are sufficient to cover current liabilities. The current assets used in the speedy ratio are hard currency, histories receivable, and notes receivable. It is because speedy ratio assumes that all assets are of equal liquidness. Analyze between speedy ratios for twelvemonth 2009 of Dutch Lady Company is 1.406 times, F & A ; N Company is 0.982 times, Nestle Company is 0.577 times, and Spritzer Berhad is 2.009 times. Spritzer Berhad higher the ratio and more liquid it is. This company will be carried out any downswing in the industry comparison with other nutrient fabricating company.

Finally, hard currency ratio is a more traditional liquidness at all. The hard currency ratio is an indicant of the company ‘s ability to pay off its current liabilities if for some ground immediate payment were demanded. Cash ratio for twelvemonth 2009 of Dutch Lady Company is 0.43 times higher than 0.201 times of F & A ; N Company, 0.037 times of Nestle Company and 0.36 times of Spritzer Berhad. The Dutch Lady Company by and large means have better fiscal form. Nestle Company ability might be hard a spot converted into hard currency comparison with other nutrient industry. It is because Nestle group is exposed to foreign currency hazard on gross revenues, purchases and adoptions that are denominated in a currency other than the functional currency of the group ( Nestle, 2009 ) .

5.0 Methodology:

INDEPENDENT VARIABLES DEPENDENT VARIABLES

Data is collected from secondary informations.

Referencing: