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The ability of firms to manage short term debts and expenditures can be calculated with the formula in which value of current assets is deducted from the total value of current liabilities. If current assets are less than current liabilities we can say that entity has a working capital deficiency and if it assets are more than liabilities it shows entity is able to manage its debts and operational expenses. Working capital management helps companies to make short term decisions. The management involves different policies whose aim is to manage current assets and short term financing.
Management of assets involves cash management, inventory and debtors management. Cash management refers to the availability of cash for business to meet day to day expense. Inventory Management which includes maintaining the level of inventory to meet daily production schedule without interruption. This will lower the reordering cost which subsequently increases the cash flows. Debtors management refers to the developing of credit policy for customers which will attract customers ,once customers are satisfied and willing to the credit policies of the entity this will increase revenue as well as Return on Capital.
Short term financing involves devising appropriate source of financing as the inventory used by an entity is usually financed by suppliers or banks .Most firms find the need of short term financing because cash flow from operations may not be sufficient for the growth of firms financing needs.
It is very important to manage the seasonal effects on working capital. Work capital of seasonal businesses show drastic changes during peak and off season. This fluctuation is dependent on the ability of the firm to manage its working capital. As explained by Rene Agredano in his article that to ensure efficient working capital a firm should keep track of its accounts receivables during peak season and avoid overspending in off season. IF we take an example of any seasonal business
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1. LIFO vs. FIFO LIFO (last in, first out) and FIFO (first in, first out) are two different ways of accounting for the value of unsold inventory. The FIFO method considers unsold inventory to be that which has been acquired most recently, and the LIFO method uses the goods bought earliest as the unsold inventory.
Alternatively, the financial planning helps corporations to estimate asset investment requirements in order to achieve long term objectives. Financial planning activity starts from the analysis of business environment and feasibility of business model. Then it identifies the sources needed to achieve these objectives in monetary units by quantifying scarce resources such as raw materials for production process, labor, necessary equipments, inventory, and so on.
A good financial analysis is based on the tradeoff between these two methods. However, practically the IRR method is used widely in investment appraisal decision. The prime reason behind selecting the IRR method of appraisal is it is comparatively straight forward and can be used without having a prior experience in capital budgeting.
It is pertinent that a company possesses enough liquid assets to meet its short term obligations as and when required. This is to ensure the smooth functioning of the company. (Brigham and Gapenski 1988) For instance: Amber has $1,200 in current assets and $1,000 in current liabilities.
The Company is exploring the possibilities of expanding its operations in to the African country of Medco Republic. This country has until quite recently been inflicted by conflicts and regarded politically unstable. This report becomes necessary in view of the earlier political instability prevailed in the country.
ll consider the following factors before planning and recommendation; initial investment, operating cash flow (OCF), terminal cash flow, cost of capital, opportunity cost, and break-even point. Initial investment includes; cash outlay, working capital, salvage value and tax
This is by offering businesses the ability to calculate the safety stock inventory. This in turn, ensures that businesses have the correct amount of inventory at the right place. These technologies ensure that there is working capital optimization (Partridge,
The amount received is subject to marginal tax rate of 40%. Therefore, the amount received from selling the old ATM machine is reduced by 40%. On the other hand the gross outflow required for the installation of new ATM machine is $1,000,000. Therefore,
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