Sie sind auf Seite 1von 9

Contents

1.0 Question -1...........................................................................................................................2


1.1 Factors affecting the effectiveness of companys working capital management.............3
1.1.1 Company size and business nature............................................................................3
1.1.2 Storage Time or Processing Period............................................................................3
1.2 Risk-return trade-off involved in managing a companys working capital......................4
2.0 Question 2............................................................................................................................5
2.1 Challenges encountered in managing working capital of companies..............................5
2.2 To optimize working capital management........................................................................6
2.2.1Reduce Accounts Receivable......................................................................................6
.2.2.2 Increase Account Payables........................................................................................6
2.2.3 Reduce Inventory.......................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

1.0 Question -1
Working capital (abbreviated WC) is a financial metric that represents the operational
liquidity of a business, organization, or other entity (Boundless 2014). It refers to investment
in current assets and current liabilities which are liquidated within one year or less and is
therefore crucial for firms day-to-day operations (Mwangi, et al., 2011) .
According to (Eljelly, 2010), working capital management plays a significant role in
determining success or failure of firm in business performance due to its effect on firms
profitability as well on liquidity. Business success depends heavily on the ability of financial
managers to effectively manage the components of working capital.
Businesses are increasingly realizing the pressing need of developing and effective working
capital management to ensure their business continuity and sustainability in the ever
competing market. Having a healthy cash flow and investing heavily in processes that help
them find the hidden cash within their companies is t the practice that they should quest to
evolve in their business process. (Sen & Oruce, 2010) Underline in their study that efficient
working capital management includes planning and controlling of current liabilities and
assets in a way it avoids excessive investments in current assets and prevents from working
with few currents assets insufficient to fulfill the responsibilities.

This investment is proving necessary as many treasury management departments still have
poor cash management and working capital processes in place. Therefore, Optimizing cash
inflow all starts with an awareness of where payments begin. But the effect of this
optimization depends on the nature of the process involved and the different node that the
cash will pass through.
To understand better what factor contribute to the effectiveness of working capital
management in companies, the internal and external factor that influence with different
context of business setting is discussed.

1.1 Factors affecting the effectiveness of companys working capital


management.
1.1.1 Company size and business nature

The effectiveness of working capital management is affected by the company size depending
on its portfolio and market coverage. When the size of the company is more complex and
dealing with different market situation, the need of fostering effective cash flow management
becomes a pressing need. The activities which is outside the companys core business will
incur more expenses if not outsources. This may include Improving inventory management
and procurement process that ensures robust and reliable supply chain management.
(Jason, 2012) Emphasizes that as the size of the company spans, the management might
focus more on the corporates finance regarding long-term investment and financing
decisions. However, short-term asset investments play a significant role in the balance sheet
of companies. In small company, the finance can be properly managed by enabling them to
clearly monitor their financial health and how to raise the cash.

1.1.2 Storage Time or Processing Period

The most important thing in effectively managing the working capital of companies is to
critically look at the means through which payments are received in terms of time factor.
(Kyriba Corporation, 2011) States that be it automatic bank payments, transfers, letters of
credit or checks, the processing times and the costs involved can impact working capital
significantly. (James, 2011) Argues that the processing time is determined by the inventory
policy of the company if the supply of inventory is prompt and adequate, less funds will be
needed. But, in the case of seasonal or unpredictable, extra funds will be invested in
inventory. Investment in working capital will fluctuate in case of seasonal nature of supply of
raw materials, spare parts and stores

1.2 Risk-return trade-off involved in managing a companys working


capital
The vital components of working capital are: accounts receivables (AR), accounts payables
(AP), and inventory. To reduce the risk involving the in managing the companys working

capital, these three components musk work in synergy and balanced manner. (Kennet, 2012)
States that the cash is still king and the decision actions undertaken to obtain it necessitate the
strict reduction of the companys working capital. This however may sometimes lead to
unintended negativeand counterproductive to the companys business.
The principle that potential return rises with an increase in risk. Low levels of uncertainty
(low-risk) are associated with low potential returns, whereas high levels of uncertainty (highrisk) are associated with high potential returns. According to the risk-return tradeoff, invested
money can render higher profits only if it is subject to the possibility of being lost.

Companies with aggressive working capital strategies involve less capital and operate more
efficiently, therefore the return on equity and assets should be higher. Moreover the more
aggressive strategy the higher the risk. Opposite situation is when we take into account the
conservative working capital strategy, involving more capital and operating less efficient
the ratios of return and risk should be lower. In the table below we can see, that profitability
varies inversely with liquidity and profitability moves together with risk.

2.0 Question 2
2.1 Challenges encountered in managing working capital of
companies.
Conservative working capital approach is joined with an abnormal state of current resources
as a rate of aggregate resources and a low level of current liabilities as a rate of aggregate
liabilities. A moderate approach can be described by either a low level of current resources as
rate of absolute resources or a low level of current liabilities as rate of aggregate liabilities or
an abnormal state of current resources as rate of aggregate resources and an abnormal state of
current liabilities as rate of aggregate liabilities. The level of current resources and current
liabilities should be observed furthermore settled in a long-term methodology. This can
decrease aimless choices furthermore, instability associated with danger appraisal.
The capital structure, speculations, profit arrangement and organization valuation are liable
to an organizations choice making, while working capital administration is the consequence
of transactions with its clients or subcontractors and stock administration (Filbeck & Krueger,
2012) Typically these choices are made by numerous directors in diverse divisions, so
synchronization is one issue and administration is another, which has to be more propelled
procedure. An absence of working capital administration may offer ascent to particular
danger on the capital market and lead to wrong choices joined with the capital structure,
ventures etc, on the grounds that they are associated with the expense of value, which is
ascertained available premise (CAPM for instance), where the business and particular danger
is considered. These issues were dissected by (Harris, 2010) who expressed that working
capital administration is a straightforward method for guaranteeing the capacity of an
association to fund the distinction between its present resources and current liabilities. In
more propelled exploration, working capital administration has turned into a standout
amongst the most vital issues in associations and numerous monetary administrators are
attempting to recognize the fundamental determinants of working capital and their ideal
levels (Lamberson, 2009)
This can likewise make an anticipated stream of procedures furthermore, extends in an
organization. The more exchanges the higher the level of current resources and liabilities,
which can likewise impact the level of working capital. The more preservationist arrangement
the all the more long haul capital will be utilized to fund working capital and decreasing the
arrival and worth included proportions we can anticipate.

2.2 To optimize working capital management


2.2.1Reduce Accounts Receivable
Having Accounts Receivable such as amounts owing by customers is both good and bad. It's
good because it means that you have sales and customers. It's bad because it is cash that you
don't have now, and there is always a possibility that you won't collect. When you offer credit
terms to your customers it is extremely important to have a system in place to manage your
accounts receivable. It is difficult to collect amounts due when you don't actually know how
much you are owed or when it is due.
.2.2.2 Increase Account Payables

Since records payable is a back-office capacity, it doesn't generally take focal point of the
audience as organizations hope to develop or manufacture game changer. Truth be told,
regularly creditor liabilities takes a rearward sitting arrangement to administration's
contending needs. With regards to working capital advancement, notwithstanding, expanding
payables ought to be a centre system.
Undoubtedly, numerous organizations work this system by amplifying payables to the extent
that this would be possible to augment free income. Sadly, this methodology is not generally
the right one. At times, deferring instalment can disintegrate supplier goodwill, bringing
about slower conveyance times, less eagerness to alter deformities, slower reactions to
questions and more burdensome instalment terms. On the other side, paying early can some
of the time yield generous advantages in circumstances where suppliers offer rebates or
refunds for ahead of schedule instalment.
This is about more than ensuring invoices are received and processed in a timely fashion. Its
about adopting a management focus that emphasizes the importance of optimizing payables
and freeing up working capital to fuel growth.

2.2.3 Reduce Inventory

Precise and auspicious data is important for inner credit and collections experts as well as for
clients. Credit experts need data to help organize activities, to give data to clients, to under a
whole process of scrutinizing choices and discussions. For example, a credit chief ought to
have the capacity to effortlessly see instalment history for a client when figuring out if or not
to build credit limits. A credit manager ought to have the capacity to rapidly see late receipts
and late instalments so as to focus the status of every record in their credit line. Clients
require auspicious and exact receipt and articulation data also. A few studies show that most
clients don't plan to pay late.
A larger number of organizations fail due to r absence of money than from absence of benefit.
One of the biggest channels on an assembling organization's money is stock. Lessening stock
and you will build the measure of money accessible to run the organization. It takes money to
purchase or construct the stock you are going to offer. The money you need to spend before
you can get paid is called working capital. Working capital is utilized to reserve operations
and stock. Numerous organizations, if not most, get to bolster their fleeting money needs. On
the off chance that they don't oversee money well, they can run out and the bank may not be
willing to give more. No money, then no real way to make finance and no real way to pay
suppliers. This is demise winding that an excess of organizations go down.

3.0 Conclusion
In conclusion managing working capital management is very challenging and organization
has to adapt policies and procedure to deal with it in multidimensional way. It has more to do
with the internal process of the company and how the optimize the different components of
their working capital. Companies should not only focus the long term financial goals, but also
they should embrace the importance of taking into account the short term goals. Therefore,
liquidity come very important for guarding against the quick and unexpected scenario the can
suddenly arise. To reduce the Risk-return trade-off involved in managing a companys
working capital, the three main components of the working capital which are: accounts
receivables (AR), accounts payables (AP), and inventory must work in harmonious process to
that the company can opt for gaining for more profit while reducing the risk the comes with
it.
After tremendously reducing the risk, companies need not the stop there, but also optimizing
the effectiveness and efficiency of their working capital management. This can be done by
reducing account receivable, increasing account payable and finally reducing the inventory
by optimizing the supply chain.

References
Eljelly, A., 2010. Liquidity- Profitability Tradeoff:An Emprical Investigation in an
Emerging Market.. International Journal of Commerce and Management, 2(14),
pp. 48-61.
Filbeck & Krueger, 2012. Industry Related Differences in Working Capital
Management. Mid-American Journal of Business, 20(2), pp. 11-18.
Harris, A., 2010. Working Capital management :Difficult but rewarding. Financial
Executives, 4(20), pp. 52-53.
James, S., 2011. Essentials of Working Capital Management. 1st ed. New Jersey:
John Wiley and Sons.
Jason, m., 2012. Relationship between company size and working capital
management. international journal of business and economics, 6(8), pp. 187201.
Kennet, m., 2012. the risk return-trade-off involved in managing the working
capital of finance corporates. Polish journal of economics, 3(6), pp. 45-71.
Kyriba Corporation, 2011. Working Capital Management Analysis. [Online]
Available at: http://www.kyriba.com/knowledge/articles-andpublications/developing-effective-working-capital-management
[Accessed 12 August 2015].
Lamberson, H., 2009. Changes in Working Capital of Small Firm in Relation to
Changes of Economic Actiivity. Mid-American Journal of Business, 2(10), pp. 4550.
Mwangi, L., Makau, M. & Kosimbei, G., 2011. Effects of Working Capital
Management on Performance of Companies .. European Journal of Business and
Management, 6(11), pp. 195-205.
Sen, M. & Oruce, d., 2010. elationship between Efficiency Level of Working
Capital Management and Return on Total Assets. International Journal of Business
and Management, 4(10), pp. 109-144.

Boundless.2015. Working Capital Management Analysis. Boundless Accounting.


Boundless,

21

Jul.

2015.

Retrieved

29

Aug.

2015

from

https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/reportingof-current-and-contingent-liabilities-9/reporting-and-analyzing-current-liabilities64/working-capital-management-analysis-304-3753/