Week 7 Discussion: Working Capital Management
Close to 50% of the typical industrial and retail firm’s assets are held as working capital. Many newly minted college graduates work in positions that focus on working capital management, particularly in small businesses in which most new jobs are created in today’s economy.
To prepare for this Discussion: Shared Practice, select two of the following components of working capital management: the cash conversion cycle, the cash budget, inventory management, and credit policies. Think about scenarios in which your selected topics were important for informing decision making. Be sure to review the video links above and conduct additional research using academically reviewed materials, and your professional experience on working capital concepts to help develop your scenarios. Support your discussion with appropriate examples including numerical examples as necessary.
1. Post your response no later than Sunday, February 9.
2. Read and respond to at least 3 of your classmates’ posts. Below are suggestions on how to respond to your classmates’ discussions:
1st student response (Monika Rallabandi) :
Working Capital Management
Working Capital Management (W.C.M) is a business technique expected to ensure that an association works successfully by watching and using its present assets and liabilities to the best effect. The essential job of W.C.M is to engage the association to keep up sufficient cash stream to meet its transient working costs and transitory commitment commitments. An association’s working capital is involved its present assets short its present liabilities. (McDonald, 2020).
Working capital is an extent of corporate transient cash related status similarly as its adequacy. Working capital is arrived at by subtracting hard and fast current assets with its total current liabilities (McDonald, 2020).If the differentiation in extent between current assets and current liabilities goes as follows
It’s an indication of a negative working capital and an anything more than two strategies the corporate isn’t contributing its excess assets. For one to fathom working capital through and through is by understanding the piece of W.C.M right now conversion cycle and cash spending plan and their association with W.C.M.
It is similarly a fundamental piece of the CCC. Typical inventory age is the underlying portion of CCC. Inventory sum furthermore helps in the fundamental authority to the money related aides of the association. They lean toward that the association’s cash isn’t placed assets into a ton of the things that make it rash for the association. Thus, it is best by the chiefs that the inventory should be with the ultimate objective that the quality thing is open at low costs and in preferred sum rather than excess sum (Yasmin, 2020).
Thus, to keep up an inventory, affiliations use various methods like the ABC structure, money related solicitation sum (EOQ) procedure, at the last possible second system, and so forth (Yasmin, 2020).
McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8.
Yasmin, S. (2020). Role of Working Capital Management on Business Competitiveness of the Manufacturing Companies Listed in Dhaka Stock Exchange.
2nd Student Response (Ravi Teja Gudapati ):
The Working Capital
The cash conversion cycle: The cash conversion cycle is utilized by the business association to decide its proficiency to create cash from tasks. It measure time required some investment of buying inventory and when the cash are gotten from the record receivables. There are various choices can produced using this equation. The main choice created from this equation is speculation choice. The financial specialists intently screen the cash conversion cycle to decide the presentation of the association before putting resources into it (García , 2007).
The cash conversion cycle give the genuinely necessary bits of knowledge about money related security of the association. Right now, the cash conversion cycle is long then the business association can’t meet its monetary commitment; and in this manner, the financial specialists will avoid it. The subsequent choice created from this equation is the spending choices. Through cash conversion cycle, the association’s management will realize when to pay obligations and costs and when to maintain a strategic distance from it (García, 2007) .
Inventory Management: it alludes to the supervision of the items from the distribution center to the retail location. It is one of the parts of working capital and number of choice can be created from it. The main choice from the inventory management is the asset allotment choices (Hunt, (n.d)).
The designer management encourages the business association to know regions that require assets center and zones that don’t require assets. Right now, business association will guarantee there is no wastage of items or inaccessibility of items in a specific market (Hunt, (n.d)).
Hunt, Janet. (n.d.). Describe the Two Major Components of a W.C.M Strategy. Small Business – Chron.com. Retrieved from http://smallbusiness.chron.com/describe-two-major-components-working-capital-management-strategy-24538.html
García T. (2007) Effects of W.C.M on SME Profitability, International Journal of Managerial Finance, Vol.3 No.2 2007
3rd student Response (Hyndavi Mandava) :
Working Capital Management
In this, the term working capital management involves ensuring that a company does not run out of funds for its day to day expenditure or any forthcoming debt to pay. Some companies have been tending to operate on negative working capital in which could either be because its short term capital is not managed properly. Within the company that takes on too much short-term debt and it has been generating huge operating losses or because its business model ensures. On that it receives cash upfront of working capital management thereby encompasses all facets of current assets and liabilities. One potential solution to working capital management is for a company to match its payables and receivables cycle. By availing such programs, companies can not only optimize their working capital but also unlock valuable operating cash flow trapped in their supply chains (Aysu Şalvız, 2016).
Firms and individuals create a cash budget. Since this question was asked under personal finance let it is limit ourselves to personal finance. A cash budget is simply a personal plan for outlining sources of income and allocating them to various categories such as cell phone bills, groceries, rent, etc. Cash budgeting is primarily for those who are still developing good spending and discipline habits. It is too easy to swipe a debit or credit card without a second thought. Since we do not see the money leaving your account at the time that you swipe our card we end up spending more than is ideal, more quickly than is ideal (Engeda, 2016).
It makes it very hard to manage the streamline and keep track of what is going on in their business simply. As per the view these tools are not connected to each other and more so, not connected in any way to their unique business processes and systems. With the lack of a dedicated system makes it increasingly more difficult to keep track and follow up with customers. As their numbers grow which will damage the business on the long run missed follow-ups, late shipments, not finding the correct information when a customer calls out of the blue and asks for status (Jerng, 2017).
Numerical example: Let us consider an example, if the companies manufacturing assets in present level will be as follows.
In this, the cash in the bank is 2,00,000
Accounts receivable via outstanding is 8,00,000
Inventory will be 10,00,000
So that the total current assets has been 20,00,000
As per that the manufacturing liabilities in present level will be as follows.
Outstanding accounts payable is 6,00,000
Due this year the Short-term debt payments is 3,00,000
Due this year the portion of long-term debt is 1,00,000
For this year other accrued expenses will be 8,00,000
Total current liabilities = 18,00,000
Hence, the Manufacturing Net Working Capital = Current Assets – Current Liabilities
= 20,00,000 – 18,00,000
Aysu Şalvız, E., İpek Edipoğlu, S., Orhan Sungur, M., Altun, D., İlke Büget, M., & Özkan Seyhan, T. (2016). Critical Incident Reporting System in Teaching Hospitals in Turkey: A Survey Study. Turkish Journal of Anesthesia & Reanimation, 44(2), 59–70. https://doi.org/10.5152/TJAR.2016.75133
Engeda, E. H. (2016). Incident Reporting Behaviours and Associated Factors among Nurses Working in Gondar University Comprehensive Specialized Hospital, Northwest Ethiopia. Scientifica, 1–7. https://doi.org/10.1155/2016/6748301
Jerng, J.-S., Huang, S.-F., Liang, H.-W., Chen, L.-C., Lin, C.-K., Huang, H.-F., … Sun, J.-S. (2017). Workplace interpersonal conflicts among the healthcare workers: Retrospective exploration from the institutional incident reporting system of a university-affiliated medical center. PLoS ONE, 12(2), 1–13. https://doi.org/10.1371/journal.pone.0171696s
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