Effective Management Of Working Capital

Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses.

Assets and liabilities are bifurcated in current and non-current. Current asset is defined as any asset which can be converted into cash readily and will be used within one accounting period normally 1 year e.g. Receivables, Inventory, Prepaid Expenses.

Items of value to a company such as equipment or supplies needed for running an efficient business are called an asset. A liability is when a company owes for a service or pay for employees. After a liability is subtracted from an asset this becomes the owners interest in the company or owners’ equity. Regardless of the standards followed by accountants, they will always classify accounts into these three categories resulting in the Accounting Equation: (Editorial Board, 2012, p. 9- 10)

Current liabilities are “obligations that must be settled within 1 year or the operating cycle, whichever is longer” and are “usually satisfied by transferring a current asset.” (). It includes accounts payable; short-term notes payable, income tax payable, accrued expenses, and portion on long-term debt payable.

Applying for an unsecured loan means you don't need collateral, but it also means that you'll have to rely on your credit score to ensure the best rates on interest. The interest rate is higher when there's no collateral securing the repayment of the loan. The amount of debt you have versus the income you bring in each month can have an impact on the loan amount

These liabilities are described as what the business or organization owes such as accounts payable, payroll taxes due, notes payable, and mortgages payable are all liabilities. Assets are economic resources that have expected future benefits to the business (Baker & Baker, 2000). It is described as what the business or organization owns or controls. This can include cash, accounts receivable, notes receivable, and inventory.

Cash + cash equivalents + short term investments (marketable securities) + current receivables/ current liabilities

To begin current assets are assets on a company's balance sheet that will be consumed and converted to cash within one year. These assets could included marketable securities such as treasuries or inventory expected to be used within a year. In some firms, unfinished goods may be considered current assets as inventory. Prepaid expense

Secured loans are usually much quicker to process because we don’t have to bother pulling credit data. In addition, more people can qualify for secured loans compared to unsecured loans. Unsecured loans require clients to pass credit checks.

Humbro PLC have been successful with their Olympic themed board game, they have decided to take on a business venture of an expansion where they would be able to create a new product which can capitalise on the next football world cup. The finance director has been absent on a long term leave which has led to a lack of clarity and understanding of the various financial options among the other board members within the company. The managing director has asked for some financial advice and if this expansion will go ahead. In this report I will analyse Humbro PLCs financial information give my conclusion followed by my own recommendations for the company and if the expansion is to go ahead.

Working capital management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. This chapter discusses the management of current assets, particularly cash, marketable securities, inventory, and receivables. This chapter answers some Basic questions involving working capital management

Thus, keeping the importance of working capital management in view, the present study aims to analyze:

Most major loan purchases, such as your home or car, are called secured loans. They are called secured loans because the debts acquired under this type of loan are secured against collateral. A mortgage loan is considered a secured loan. In a mortgage loan, the lender has the right to repossess the home if you default on your payments. Defaulting on

The topic of the relationship between working capital management and the profitability has the attention of the financial researchers in the recent past years. As the working capital management has an effect on the profitability of a firm. To examine that relation, researchers have used many approaches and methodologies. Moreover, they have used different data samples depending on the country or the region that they wanted to study. In this paper, five of those researches are going to be reviewed.

Working capital plays a vital role in the company’s operations and requires the efficient management. The management of working capital concerns the management of cash, inventories, accounts receivable and accounts payable. It is necessary for a company to monitor its working capital properly and maintain its balance at the appropriate level. Shortage of working capital may lead to lack of liquidity as well as loss of production and sales; on the contrary, excess balance of working capital could be seen as loss of investment opportunities.