What are the things you consider? Shall I buy it paying by cash or installment basis? If I pay it by cash, a large amount of my savings will o to that car sacrificing other things want to buy also. But if I pay it by installment, I have to consider the end of the payment total amount against cash price. Also have to consider whether I have enough salary to pay it by monthly for a period of time. Also have to consider whether can continue receiving that particular amount until the duration of my monthly payment.
This paper will try to present a good picture of how to manage our current assets and liabilities. FINDINGS To begin with, Current assets is defined as company owned resources with a considerable value that is expected to be converted into cash in a period of sees than one year in the normal course of business. These includes cash, inventory, accounts receivable, prepaid expenses, and short-term marketable securities and other assets that can readily be converted into cash within one year.
On the other hand, current liabilities are company’s debts and loans or obligations that must be paid back to the lender within one year or less. This includes accounts payable , accrued expenses, and current portion of long term debts or loans. And if you compare the totals Of these two groups Of items, the difference is called the company’s working capital. What has irking capital management has to do with these two groups of items?
Working capital is the cash needed to pay for the today operation of the business Danger of Overloading Overloading happens when a business tries to do too much, too quickly with too little long-term capital Overloading represents an imbalance between the orders a business accepts and the means it has to fulfill them ; Overloading happens when a business takes on customer orders, but does not have enough current assets, or working capital, to meet these demands ; Overloading is particularly common in young, rapidly expanding businesses.
It can be extremely serious, even fatal to the business The two main objectives of working capital management is to increase the profitability of a company and to make sure that it has enough cash to pay or meet its short-term obligations as the due dates of these loans comes near. Working capital of a company can be classified as Aggressive, Moderate or Conservative. An Aggressive working capital means a company chooses to operate its daily business activities by providing lower level of inventory, accounts receivable, and cash.
It may increase profitability because less cash is invested into its inventory,. However, it will also increase the risk of possible cash shortages or running out of inventories that may result in less revenues. A Conservative working capital means maintaining a larger cash balance, and bringing the cash surplus into a more profitable business activities; giving flexible terms for credit customers; or having high level of inventories. However, there is less profit in this class. A Moderate class means it is between the Aggressive and the Conservative class.
The two main objectives of working capital management are to increase the profitability of a company and to ensure that it has sufficient liquidity to meet worth-term obligations as they fall due and so continue in business (Pass and Pike 1984). CONCLUSION The heart of a successful business organization depends on how the current assets and its current liabilities are managed. An effective working capital management, which is the difference between the current assets and the current liabilities, most of the time, results in a successful business enterprise.
Having a successful business organization makes the shareholders or owners happy. . Sources of Additional Working Capital Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash ! ) Payable (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans f you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overloading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e. G. Offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines Of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a queue). How To Improve Working Capital Management “Cash is the lifeblood of business” is an often repeated maxim amongst financial managers. Working capital management refers to the management of current or short-term assets and short-term liabilities.
Components of short-term assets include inventories, loans and advances, debtors, investments and cash and bank balances. Short-term liabilities include creditors, trade advances, borrowings and provisions. The major emphasis is, over, on short-term assets, since short-term liabilities arise in the context of short-term assets. It is important that companies minimize risk by prudent working capital management. What Affects Working Capital Management 1 . Organizations are generally focused on cash, accounts payable, and supply chain issues.
However, external issues like the legal and business environment, or internal mechanisms like organization structure and information systems, can significantly impact working capital. 2. Owing to market pressures, companies are led to paying a lot of attention to producing good quarterly results quarter after quarter. Undue focus on this may sometimes produce a flattering but inaccurate snapshot of working capital performance. This also happens in companies that have a marked seasonality of operations with working capital requirements varying widely from quarter to quarter.
Measures to Improve Working Capital Management 1 . The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer, and actions by competitors. The effect of unforeseen demands on working capital should be factored in. 2. It pays to have contingency plans to tide over unexpected events. While market leaders can manage uncertainty better, other companies must have risk management procedures. These must be based on an objective and realistic view of the role of working capital. . Addressing the issue of working capital on a corporate-wide basis has certain advantages. Cash generated at one location can well be utilized at another. For this to happen, information access, efficient banking channels, good linkages between production and billing internal systems to move cash and good treasury practices should be in place. . An innovative approach, combining operational and financial skills and an all encompassing view of the company’s operations will help in identifying and implementing strategies that generate short term cash.
This can be achieved by having the right set of executives who are responsible for setting targets and performance levels. They are then held accountable for delivering. They are also encouraged to be enterprising and to act as change agents. 5. Effective dispute management procedures in relation to customers will go along way in freeing up cash otherwise locked in due to disputes. It will also improve customer service and free up time for legitimate activities like sales, order entry, and cash collection. Overall, efficiency will increase due to reduced operating costs. 6.