Improving the Working Capital Cycle for SMEs in the UK


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.

While, LCC had highest working capital in year 2011-12 and decreased over the period of time going in negative value. This indicates LCC lags in managing working capital and not able to pay its current liabilities. ICC has benefit in this area.

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.

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

The cash conversion cycle is a result of time taken by the company for their collection from receivables (average collection period) and time needed to convert material into goods (day inventory held) after subtracting the time taken to pay its current obligation (day payable outstanding). The average collection period of account receivable and the day inventory held ratio improved in 2016 after rose to the highest days in 2014, which

What is working capital? Working capital is defined as the difference between current assets and liabilities. Current assets are assets that are expected to be turned into cash in within a year. Current liabilities are obligations that are due within one year. Working capital measures the amount leftover when you take the liabilities out of the assets, this number can be positive or negative.

The firm’s accounts receivable ratio increased from 68.71 in 2006 to 74.56 in 2010. This means that it is taking Abbott almost six days longer to collect from its customers today than it did five years ago. Furthermore, the firm’s accounts payable days has decreased from 43.72 in 2006 to 38.22 in 2010. This means that Abbott is paying its suppliers 5½ days earlier today than it did in 2006. A change in the inventory ratio from 8.01 in 2006 to 11.03 in 2010 indicates that it is taking the firm longer to sell finished goods than it used to. The increase in the accounts receivable and inventory ratios, combined with a decrease in the accounts payable ratio, indicates poor working capital management and helps to explain why the firm has increased its holdings of cash and short-term investments. To correct this, Abbott’s managers should focus on collecting cash from its customers faster and delaying payments to its suppliers. To maximize its cash position, the firm would be best served by paying its suppliers in the same amount of time as it collects payment from its customers.

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

Working capital is the money required to finance the day to day operations of an organization. Working capital may be required to bridge the gap between buying of stocked items to eventual payment for goods sold on account. Working capital also has to fund the gap when products are on hand but being held in stock. Products in stock are at full cost, effectively they are company cash resources which are out of circulation therefore additional working capital is required to meet this gap which can only be reclaimed when the stocks are sold (and only if these stocks are not replaced) and payment

However, this metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. In fact, most business acquires inventory on credit, which results in accounts payable. A business can also sell products on credit, which results in accounts receivable. However, cash is not involved until the business pays the accounts payable and collects the accounts receivable. Therefore, the cash conversion cycle measures the time between the outlay of cash and the cash recovery. The cash conversion cycle cannot be observed directly in cash flows, which are affected by financing and investment activities as well; rather, the cycle refers to the time span between a firm's disbursing and collecting cash (Mueller, (2017)

Working capital can come in many forms from acquiring (financing or obtaining) inventory or raw materials to obtaining or having the cash on hand to pay needed labor, utilities and even rent.

This report is an evaluation provided to a finance director of a UK public limited manufacturing company, whose subsidiaries are around the world. The company’s stock is trading on the London Stock Exchange. The report is going to provide some information about working capital management (WCM).

Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, the ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date.

2. There is no significance co-relation between working capital management and profitability of the sme’s.