Question

A company’s return on net operating assets (RNOA = NOPAT/Average NOA) is commonly used to evaluate financial performance.

If managers cannot increase NOPAT, they can still increase this return by reducing the amount of net operating assets (NOA).

List specific ways that managers could reduce the following assets:

1. Receivables

2. Inventories

3. Plant, property equipment

Answer 1

Part 1 - Specific ways to reduce the inventory

1) Company can adopt Just in Time (JIT) Method of inventory. It increasing efficiency and reduce waste. It follws the priciple of ordering the goods only when they needed

2) Increasing sales. By increasing sales, Inventory cost can be lower

3) Reduce Manufacturer and supplier lead times

4) Reduce the order sizes

Part 2 - Specific ways to reduce Accounts receivable

1) Reduce the Credit period

2) Optimize the collection process

3) Offering early payment discount

4) Give an Payment plan for long outstanding debt

Part 3 - Specific Ways to reduce Plant, Property and Equipment

1) Rent or lease the Equipment to reduce the equipment cost. Due to this only thos equipment will be used which are required and no other equipment will remain idle.