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Managing Working Capital - Essay Example

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Liquidity is quite necessary for a firm to ensure its ability to meet short term obligations and its operations can have a smooth…
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Managing Working Capital
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Managing Working Capital

Download file to see previous pages... The working capital management takes the concept of managing inventories, cash, receivables and payables and the short term funding. Inventory management is quite important for an organisation. Maintaining a high level of inventory can incur higher cost for the firm, while a low inventory level can put a hindrance on the way to meet the customer needs. So it is very much necessary to have ideal inventory level to meet the customer demands at a minimum possible cost. In a similar way, the receivables would indicate about the willingness of the organisation to offer products or services on credit based. This credit sale is quite risky if not managed well. On the other hand sometimes firms have to offer their products or services on credit basis, as that would fetch more customers to increase the business volume. This again is a risk return trade-off for the organisation.
Cash is an important component of the current assets on balance sheet. This is the most liquid asset that a company can avail in troubled situation. On the other end, having an excess level of cash can block to use that as operating capital. So having an optimum cash level is necessary for proper business functioning. Cash and short term securities management is very much needed from liquidity point of view. In all, a proper management of working capital is very much necessary to generate cash and improve profits at a reduced risk level.
The allocation can be changed with due change in the financial and operational environment. For an instance in recession time, firms would like to cut down their inventory levels, delay the debt payment and at the same time would like to accelerate the payments from debtors. So different periods can have different working capital needs. Even this can vary depending upon the industry or depending upon the size of the organisation. For an instance retail ...Download file to see next pagesRead More
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