Business enterprises are in a constant act of balancing different facets that ensure their survival. A healthy business should have more assets than liabilities (Lorenzo and Allande 164). The poise between assets and liabilities is not an overnight achievement, but a constant balance of books that requires well-thought-out decisions. Working capital is described as the available amount of money that is used in the daily operations of a business. All businesses require that a certain quantity of money be made available at the nearest call (Lorenzo and Allande 166). Working capital enables a business to meet its short-term obligations as it works towards long-term commitments. This paper explains the management of working capital and its sources. The paper will touch on the management of current assets, cash management, management of accounts receivable, and inventory management.
Sources of Working Capital
Different sources of working capital depend on the strategies and financial ability of an organization. When the net income of an organization is in stable condition, it offers the company more disposable income in terms of working capital. A high net income means less liability and more money to spend (Lorenzo and Allande 167). A desire to get more profit and minimize liabilities drives all profit-making organizations. When the liabilities of an organization are more than assets, the company is supposed to work towards reducing expenditure. An increase in liabilities affects the amount of working capital. Long-term loans are used to provide money for working capital. There are instances when an organization is required to fund certain activities that are profitable yet it does not have the money. Such a circumstance forces a business to borrow and invest money in a venture whose returns are good enough to repay the loan and leave the organization with a profit (Lorenzo and Allande 166). In other instances, an enterprise would be required to sell some of its capital assets to raise working capital (Lorenzo and Allande 169). A capital asset is usually a form of saving in non-liquid form. The asset is meant to act as a buffer for the money of an organization. Capital asset gives the organization a standing ground when the currency fluctuates. Organizations turn to their stockholders and ask for more money to increase working capital. Enterprises rely on stakeholders when new ventures come up and the organizations do not have sufficient funds to keep the investments running.
The value of working capital is derived from its ability to ensure that a business meets its short-term obligations (Sabri 27). The survival of an organization is determined by the amount of available working capital. The working capital determines if an organization can take up available opportunities that were previously not foreseen. It also enhances the creditworthiness of an organization due to its ability to meet short-term credits. Therefore, the mutual relationship between current assets and current liabilities is achievable through proper management of working capital.
Management of Current Assets
Assets are the single largest component of an organization. A business entity is measured by the amount of property it owns. Assets are the difference between capital and liabilities (Sabri 27). Capital as the owner’s equity belongs to the proprietor of the business and not the company itself. Liabilities are what the company owes other entities. Therefore, the value of a business is a measure of the assets that it owns. Current assets refer to the amount of money that an organization has together with other assets that can be converted into cash or consumed within one year. Many organizations prefer keeping their property in form of fixed assets because it is safer than when it is in form of current assets. Internal and external factors influence the management of current assets. Internal factors refer to the issues generated within the organization and are subject to the decisions made within an organization. Arbidane and Volcova argue that current assets play a colossal role in the development of any business (9). They further claim that the current economic world is full of recessionary occurrences that make the business community unstable. Lack of proper management of business resources like current assets can easily throw the enterprise off balance. Part of good current asset management practices involves identifying the internal factors that affect the assets. Planning along these factors enables a business to put in place contingencies that would bring it back to stability in case of adverse effects. The success of current assets management depends on the ability of companies to master technologies and processes that keep them afloat in the case of a crisis (Arbidane and Volcova 11). Current asset management is a dynamic process that needs constant monitoring and change. Whereas the company can reign over internal factors that affect its asset management policy, it has little control over external factors. The only possible way of managing external factors is, therefore, to align the policies of an organization accordingly. A change in monetary policy by the government is one type of external factor that can affect the company. Change in monetary policy has a direct effect on the sources of money required for the working capital. The changes affect the trend of lending and borrowing money of a business (Arbidane and Volcova 13). It happens because interest rates have a direct impact on the cost of running a company. As a result, constant monitoring of events at the fiscal level enables the organization to align with the economic changes.
Every business needs to monitor its management of current assets and working capital. High-interest rates have a direct effect on production volume and affect growth. Therefore, organizations should consider both internal and external factors when planning on how to utilize the current assets. Current assets should be managed in a manner that allows the organization to manipulate them to its advantage.
Cash is an asset in liquid form and a crucial component of the functioning of an organization. Money enables an organization to run its everyday activities by meeting internal and external obligations. Cash management should be made easy through the budget-making process. Every business plans its activities based on a financial year. Planning enables an enterprise to set targets in terms of revenue collection, expenditure and contingencies. Cash management involves money in the bank and petty cash. Money meant for the daily running of the organization is classified under working capital. It includes the cash meant for salaries, bills, statutory payments, and emergencies (Leitch and Lamminmaki 1). Apposite management of money ensures the smooth running of the organization. Cash is necessary for an organization because it negates the need to borrow whenever one needs to invest or spend. Money can be saved in a bank or an office (Kontus 340). Petty cash is kept in an office and has rules attached to it on how it can be spent. Money in the bank is subject to conditions of saving as prescribed by the bank. Cash is subject to taxation and other statutory requirements that are a limiting factor to the amount available (Leitch and Lamminmaki 4). Statutory requirements affect the amount of available cash under the working capital domain.
Proper cash management requires developing governance structures to secure money. The governance structures establish an accountability platform that an organization uses to manage cash. Cash management is highly achievable when the budgetary allocations are adhered to (Kontus 341). Deviations from planned budgets pave room for cash embezzlement. The employees reallocate funds to projects that are not in the budget. Cash control systems are monitoring tools that all organizations should possess. The systems are managed by individuals that are authorized to incur expenses. The authority to incur expenses regulates the amount of money that certain individuals can authorize. Such a responsibility ensures that cash is utilized appropriately. Availability of capital when it is needed is the driving factor for budget preparations (Kontus 345). Proper cash management provides an organization with a buffer for its liabilities. There are instances when an organization might not have money to meet its obligations in the long run. The situation can be pacified by controlling and prioritizing different financial needs. Cash management is achieved by controlling inflows and outflows of money (Kontus 347). Cash inflows can be managed by ensuring that the revenue collected reaches the organization’s coffers. Money belonging to a business should not be allowed to stay out beyond a certain period. On the other hand, all the cash owned by the organization should be documented, and the amount communicated to the management. The management should be able to trail the financial performance of an enterprise.
Management of Accounts Receivables
Accounts receivables refer to the records of money expected by the organization from its debtors. Sometimes, organizations sell goods and services on credit and allow the clients to pay after a certain period. Accounts receivables must be managed in a manner that will ensure the company gets its money and value for the money. Accounts receivables ensure that an organization collects all the due payments for the day-to-day running of the organization. Such payment is deemed as a current asset and should circulate in the organization within the given financial year (Leitch and Lamminmaki 7). The money enables an organization to fund its programs without having to borrow from other sources. Every business should have structures that ensure all records of accounts receivables are updated according to the agreements. Necessary and timely follow-ups should be made as a way of reminding clients of their agreed obligations. Failure to tell customers that they need to pay the debts can lead to a loss of revenue. Delayed remittances from customers can also lead to the distortion of the working capital allocated. Poor management of accounts receivables may result in an enterprise running at a loss or incurring unwarranted liabilities (Leitch and Lamminmaki 8). Therefore, an organization needs to ensure that its accounts receivables are sound. Timely follow-ups on clients can go a long way towards ensuring that the business runs its programs smoothly.
Goods paid in time on one end lead to goods paid in time on the other end. Besides, payments for products and services ensure that there is money to procure raw materials and enhance the capacity of the organization to produce more products for other clients. The outflow of goods should be accompanied by an almost direct inflow of cash. Some organizations have a debt collecting department that is mandated to make a follow-up on debtors. An aging schedule for accounts receivables provides a clear picture of how long each debt has stayed unpaid (Leitch and Lamminmaki 10). Such a program enables the organization to follow up on defaulters and give current debts more time. Many organizations have credit policies that guide them in the management of credit facilities. The policies provide a clear prescription on how different credit circumstances can be handled (Leitch and Lamminmaki 12). Proper management of accounts receivables guarantees that the businesses do not misuse the working capital.
Inventory management ensures that there is an optimum amount of stock for the smooth running of the business. Inventory management is meant to coordinate the production and supply chain so that there are no hiccups in running a business (Ranganatham 21). Businesses produce more goods than they are demanded. Organizations can ensure that they do not produce excess products by studying previous demand and supply schedules. Inventory management ensures that a business does not run out of stock. It mostly involves the sales and production departments of the company. If the inventory is mismanaged, it has direct negative effects on the working capital (Ranganatham 24). Working capital is used in the production of stock. As a result, it has a direct correlation with an inventory. When there is too much stock, the working capital becomes depleted. In return, it affects the operations of the whole organization. When the stock does not sell or becomes obsolete, the working capital remains stagnant, therefore leading to losses. For that reason, an organization needs to control the production and movement of the stock. Business entities should work along with targets that are easily disposable to avoid the risk of dead stock (Ranganatham 27). On the other hand, the business should be in a position to study the market environment and make predictions to its advantage. The ability to predict future trends enables the company to plan and make workable contingency measures.
Management of working capital is a fundamental need for any business to survive and remain relevant. Lapses in the management of this critical facet can bring down a business. Assets, cash, inventory, and debtors need to be administered in a synchronized manner because they all work towards the same objectives. Although these components are all parts of the whole system, they are applied according to the needs of a business. Effective management of the working capital requires evaluating a business to understand how inventory, cash, current assets, and accounts receivables work and when to utilize them. Business ventures are profit-making organizations and are only safe when they avoid losses. Therefore, it is prudent for organizations to come up with a perfect balance that allows the decision made by the stakeholders to flow without hitches. Managing working capital remains essential for the survival of the business.
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