Page 138 - Corporate Finance PDF Final new link

138 Corporate Finance BRILLIANT’S

WORKING CAPITAL MANAGEMENT STRATEGIES
d{Hª$J H¡${nQ>b _¡ZoO_|Q> ñQ´>oQ>oOr

Q.18. Describe the two major components of a working capital management strategy.
EH$ d{Hª$J H¡${nQ>b _¡ZoO_|Q> ñQ´>oQ>oOr Ho$ Xmo à_wI KQ>H$m| H$m dU©Z H$s{OE&
Companies must measure risk, develop, H§$nZrO H$mo Omo{I_, {dH$mg H$m _mnZ H$aZm, BgHo$
then implement strategies for maintaining a níMmV² EH$ nm°[O{Q>d H¡$e âbmo ~Zm`o aIZo Ho$ {bE ñQ´>oQ>oOrg
positive cash flow. This strategy is called a bmJy H$aZm Amdí`H$ h¡& `h ñQ´>oQ>oOr EH$ d{Hª$J H¡${nQ>b
working capital management strategy. The
goal of an efficient working capital management _¡ZoO_|Q> ñQ´>oQ>oOr H$hbmVr h¡& EH$ Hw$eb d{Hª$J H¡${nQ>b
strategy is to balance current assets against _¡ZoO_|Q> ñQ´>oQ>oOr H$m bú` dV©‘mZ bm`{~{bQ>rO Ho$ {dê$Õ
current liabilities so a company may meet its dV©_mZ AgoQ²>g H$m g§VwbZ ~ZmZm h¡ {Oggo EH$ H§$nZr AnZo
short-term obligations and maintain operating em°Q>© Q>_© H$Îm©ì`m| H$mo nyam VWm Am°naoqQ>J EŠgn|gog H$mo ~Zm`o
expenses. Two major components of a working
capital management strategy are current assets aI gHo$& EH$ d{Hª$J H¡${nQ>b _¡ZoO_|Q> ñQ´>oQ>oOr Ho$ Xmo à_wI
and current liabilities. NPP KQ>H$ dV©_mZ AgoQ²>g VWm dV©_mZ bm`{~{bQ>rO h¢&
Current Assets dV©_mZ AgoQ²>g
Current assets are items that can be turned dV©_mZ AgoQ²>g do dñVwE± h¢ {OÝh| VoOr go H¡$e _|
into cash quickly. Examples of current assets are ~Xbm Om gH$Vm h¡& dV©_mZ AgoQ²>g Ho$ CXmhaU H¡$e
cash on hand, short-term investments, Am°Z h¢S>, em°Q>© Q>_© B§doñQ>_|Q>, B§d|Q>ar VWm AH$mC§Q²>g
inventory and accounts receivable. Accounts
[agrdo~b h¢& AH$mC§Q²>g [agrdo~b H$mo C{MV g_` na
receivable must be collected in a timely manner.
EH${ÌV {H$`m OmZm Amdí`H$ h¡& Amn CYma {X`o J`o YZ
The sooner you receive money owed, the sooner H$mo {OVZm erK« àmßV H$aVo h¢ CVZm hr erK« Amn bm^
it can be reinvested to earn a profit. Effective H$_mZo Ho$ {bE Bgo [aB§doñQ> H$a gH$Vo h¢o& à^mdr B§d|Q>ar
inventory management is also essential. The
goal is to have enough inventory to complete _¡ZoO_|Q> ^r Amdí`H$ h¡& BgH$m bú` Am°S>©g© nyam H$aZo Ho$
orders but not an excess. Excess inventory {bE n`m©á B§d|Q>ar hmoZm h¡ qH$Vw A{YH$ Zht& A{YH$ B§d|Q>ar
A{V[aŠV bmJVm| H$m {Z_m©U H$aVr h¡ O¡go {H$ ñQ>moaoO ñnog
creates additional costs such as paying for
storage space and inventory spoilage. Ho$ {bE ^wJVmZ VWm B§d|Q>ar Zï> hmoZm&
Current Liabilities dV©_mZ bm`{~{bQ>rO

A company normally incurs liabilities EH$ H§$nZr gm_mÝ`V… BgHo$ Am°naoe§g ~OQ> H$mo nyam
during the operating period to meet its H$aZo Ho$ {bE Am°naoqQ>J nr[a`S> Ho$ Xm¡amZ bm`{~{bQ>rO
operations budget. Examples of current
boVr h¡& dV©_mZ bm`{~{bQ>rO> Ho$ CXmhaUm| _| B§d|Q>ar
liabilities are inventory purchases, employee
wages, taxes and accounts payable. Unearned nM}gog, Eåßbm°`r doOog, Q>¡Šgog VWm AH$mC§Q²>g noE~b
revenue is also considered a current liability, h¢& AZAÝS>© aodoÝ`y EH$ dV©_mZ bm`{~{bQ>rO ^r _mZm
meaning you've been paid for goods or services OmVm h¡ AWm©V² AmnZo dñVwAm| `m godmAm| Ho$ {bE ^wJVmZ
but have not yet delivered the product. àmßV {H$`m h¡ qH$Vw àmoS>ŠQ> {S>{bda Zht {H$`m h¡& gm_mÝ`V…
Generally, current liabilities are expected to be dV©_mZ bm`{~{bQ>rO H$mo EH$ df© H$s g_` Ad{Y Ho$
paid during a one-year time period. Xm¡amZ ^wJVmZ H$aZo H$s Anojm H$s OmVr h¡&