Impact of Recession on Working Capital Requirements of a Company


3)Working Capital
: Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.

The working capital also has a direct relationship with the company’s current assets and current liabilities. The working capital should be positive in order to be considered good. To determine the working capital the current liabilities are subtracted from the current assets. As in the current ratio example the same pattern will show in the working capital. It will decline from 2010 to 2011 and then will become negative in 2012. This pattern shows a decline in Tesla Motors ability to use current resources to repay its debts.

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company 's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company 's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company 's short-term liquidity. The quick ratio measures a company 's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Cash flow from operations is a key indicator of a company’s financial health, because without the ability

Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.

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.

The functions of working capital are to ensure an entity has enough working capital by turning long-term assets in services and revenue. This is done by obtaining cash from different resources (such as supplies and labor), arranging working cost, provision for credit sales and provision of a safety margin.

Working capital is positive, meaning that the company has enough cash, accounts receivable, inventory, and short time investments to cover the current liabilities.

On the other hand, the company has been growing constantly. In deed, according to the net income estimation for 2007 (see Table 7) the company increases its profits $25 thousand dollars more than the previous year. This is an evidence of how the company is been management and of its willing to grow year after year. Nevertheless, the first quarter of 2007 the working capital only has increased by $7 thousand dollars, which is the difference between the current assets and current liabilities but the importance of this is that according to the rotation on receivables and payable accounts, shown in Table 5 and 10, leads us to the conclusion that the company will have to pay its suppliers

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Working capital ratio, the working capital ratio, also called the current ratio. Is a liquidity ratio that measures a firm 's ability to pay off its current liabilities. For example, financial obligation, with their current assets. Working capital is calculated

This measures the adequacy of the company’s working capital position and is as important as measuring the company’s ability to manage its two important assets, inventory and accounts receivable, efficiently.

Working capital is the excess of a company’s current assets over its current liabilities. Financially healthy firms have positive working capitals.

As a shrewd financial analyst you observe that the net working capital of the firm has typically been about 20% of the annual revenues. How would you incorporate this observation into the analysis?

Improving working capital position, a company is able to compare from year to year any increase in revenue; increase in production due to a decrease in variable or fixed costs, increase in sales due to a new sales workforce and any increase in liabilities; new short term creditors, a higher accounts payable account due to the need to purchase new materials. A company can improve its working capital by trying to keep a healthy balance between the two accounts, cutting costs, and analyzing its current short-term debt in terms of how to decrease it or find alternative ways to avoid it such as restructuring production procedures. (Schroeder, el. 2014)