Literature Review On Working Capital Management

Even though most of these expenses are not of big magnitude their value can add up and affect the company’s finances. Some of these items are accrued time for employees, bonuses, benefits, utilities, improvements and taxes. Some additional sources of working capital include; cash reserves, profits, equity loans, line of credit, and long term loans.

The most current industry averages for profit margin (Net Income divided by Total Income) among child care centers is 7.7%. For CMC, based upon their 2015 Profit and Loss statement, their gross operating profit (Net Income divided by Total Income) is -0.5%. The primary (97%) source of income for CMC is tuition payments. Understandably, the biggest expense for CMC are those associated with payroll: Payroll expenses account for 69.46% of total expenses. The remaining expenses are shown below.

Similarly, the working capital ratio is a metric that is utilized for the purpose of appraising the liquidity position of a commercial entity (Robinson). A review of the working capital of the two companies confirms that they had a positive working capital in 2014, but a negative one in 2015 (Yahoo.com). The outcome suggests that the liquidity position of the organization has deteriorated. Thus, the two commercial entities are likely to experience challenges with respect to meeting short-term obligations.

A business will run smoothly if the working capital is used effectively, hence the description “Working” capital. Managing this is a delicate balance and needs to be monitored regularly to make sure both debtors and creditors are on track. One of the most effective ways to manage this figure is to ensure debtors to the company pay their debts on time (or early if

McLaughlin (2009) states that the example organizations balance sheet (p. 125) does not show adequate cash assets (line 45), given a supposed annual budget of $3.5 million dollars, to provide adequate daily cash flow needs (p. 124). With year-end cash assets of only $16,190, working down the list of liquidable assets—using McLaughlin’s ‘water’ metaphor—savings and short term cash investments, A/R, and (in the case of for profit industry) inventories for sale, the companies working capital could be substantially increased providing more cash reserves.

Lawrence Sports is a manufacturer of sporting goods facing a fiscal dilemma in the early spring of 2011. Between the months of March and April, the company would experience an impasse within the context of its Current Cash Conversion Cycle. Here, an improved strategy for working capital management is called for.

Working or functioning capital is the extent at which the organization’s cotemporary possessions enhanced from the liabilities. In this scenario group A evaluate the financial statement of Wal-Mart that includes balance sheets, cash flow statements, and suggestion by the managerial administration along with the postscripts to the financial statements of account that needs to demonstrate how every existing resource as well as liability has influenced the tactics that are concerned with the cash management administration. Moreover perceiving the upcoming year’s prediction of Wal-Mart’s profitability or income would boost up by 20%, we then give a diversified suggestion concerning working

The financial measurement of operating liquidity available to a business is what Working capital is. All the formulas for Working Capital Ratios are shown in appendix 7.

We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit

The balance sheet provides an immediate definition of the assets, liabilities and owner's equity a given company has been able to generate over a specific period of time. Balance sheets are invaluable for seeing the financial health of a given enterprise, and they also form the foundation of ratio-based analysis of firm liquidity, profitability, production and asset efficiency and performance. Balance sheets also define current and fixed assets, in addition to current and long-term liabilities. These two delineations are invaluable for internal managers and employees to see how the company is performing in generating long-term shareholder value and also how liabilities are being managed. These measures of performance on the balance sheet are also invaluable for investors and creditors as well, they show how well a company is delivering a return on the investor's paid-in capital and how credit-worthy a business is. Creditors require

Many organizations make a financial goal to minimize the amount of cash on hand on a monthly basis. This goal is based on attempting to reduce the amount of non-earning assets for the company. Cash on hand that is not required to meet a specific need could be placed in an interest bearing account or used to pay down on a credit balance, also reducing the amount of interest a company would have to pay on a loan. “Minimizing cash balances as well as having accurate knowledge of when cash moves into and out of the company can improve overall corporate profitability.” (Block & Hirt, 2004, pg. 175).

short term obligations with current and quick assets. The positive value of the firm’s net working

By providing information on assets, liabilities, and stockholders’ equity, the balance sheet provides a basis for computing rates of return and evaluating the capital structure of the enterprise. As our opening story indicates, analysts also use information in the balance sheet to assess a company’s risk2 and future cash flows. In this regard, analysts use the balance sheet to assess a company’s liquidity, solvency, and financial flexibility. Liquidity describes “the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.”3 Creditors are interested in short-term liquidity ratios, such as the ratio of cash (or near cash) to short-term liabilities. These ratios indicate whether a company, like Amazon, will have the resources to pay its current and maturing obligations. Similarly, stockholders assess liquidity to evaluate the possibility of future cash dividends or the buyback of shares. In general, the greater Amazon’s liquidity, the lower its risk of failure.

The debt brings with it future cash flow commitment in the form principle borrowed and periodic interest which increases the potential risk of firms default and bankruptcy. (Ebaid, 2009). Modgliani and Miller in their analysis had proved that firm can lower their cost of capital by increment of leverage in their capital structure. However considerable use of debt financing would expose business to high probabilities of default (Khan and Jain, 2005).Not only this, the firms will also find it demanding to meet the promised principles and interest. Furthermore, the firm is likely to incur costs and suffer penalties if it is not able to pay the interest and principles on time. This may result in legal outlays, interruptions in

This is short-term money that is reserved for day-to-day expenses such as stationery, salaries, rent, bills and invoice payments.