Working Capital Management

Examine the concepts of working capital and the financial analysis of a company’s working capital position.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012: Concept Review Video: Working Capital Management

Working capital is the measure of a company’s efficiency and operating liquidity. The working capital is usually calculated by

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 Capital is defined as “a measure of both a company 's efficiency and its short-term financial health. (Investopedia, 2016.)” Having an efficient working capital can make or break a business’s success. To expand on our experience with working capital, we ran the Harvard Business Publication Working Capital Simulation. In our simulation, we are co-owners of Sunflower Nutraceuticals (SNC), “an internet-based, direct-to-consumer distributor and retailer of dietary supplements, including vitamins, minerals, and herbs for women (Harvard Business Publication, 2014.)”, looking to create more working capital for the company so Sunflower Nutraceuticals can expand. We were told that SNC is breaking even with a flat annual sales growth on total revenues of $10 million. The company has struggled to finance the payroll, and more than once overdrawn on the line of credit in the past. SNC keeps the minimum amount of cash on hand ($300,000) to meet its operational needs. A national bank, Miami Dade Merchant 's Bank (MDM), has issued a line of credit with restrictive covenants; credit limit of $3,200,000, and rate of 8%. We were also provided with a forecast of the global nutraceuticals market. In 2010 the market worth was approximately $128.6 billion and forecasted to grow at a compound annual growth rate of 4.9% and reach $180.1 billion by 2017 (Harvard Business Publication, 2014.). After being given all of this information, it was up to us to make

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.

Operational working capital and financial working capital should be separated and this on of Most important thing. The operational working capital, that is, the part that can be optimized and affected by the company’s operations, are the inventories, accounts receivable and accounts payable. The rest, i.e. cash, marketable securities, prepaid and all other current liabilities are a financial decision of the company, and has very little to do with the company’s operations in itself. (Filbeck & Krueger,

1. In terms of cash flow, what are the stages of the working capital cycle?

In this paper I’ll analyze the fundamental differences between the working capital structures and components for Google and Oracle, and speculate upon the main reasons why such differences exist; how each company could improve its working capital positions. As a Wall Street Analyst who has to recommend one of the companies as an investment to a company’s clients; based solely on that company’s working capital; as an Investment Banker who has to recommend loaning a substantial amount of capital to one company based solely on that company’s working capital.

To complement regression analysis, correlation analysis will be passing out to analyze the relationship between working capital management, financial decision, investment decision, accounting information system, financial reporting analysis and financial performance. Testing of significance will be approving out for all variables using t-test at a 95% level of significance and 5% of standard error. To examine the relationship among these variables, Pearson correlation coefficients will calculate.

Working capital management is a strategized tool of corporate finance for making financial decisions that make and analyze a business enterprise. This finance management method in a corporate organization involves the comprehension of the totals while conducting working capital plus how it is financed. There are several concepts that assist in the comprehension of proper working capital management. These concepts are current asset holdings and financing policies, cash conversion cycle, cash budget and cash management techniques. This context, however, probes on how current asset holdings and financing policies are used in improving the value of a company through the combination of an organization's one-time and fiscal free cash flows (FCF). It is necessitated that a firm takes in superior working capital management to incalculably cut down the required investments in functionality in order to provide larger FCFs and a higher firm value (Brigham and Daves, 2009, pg 727).

This research is titled as the impact of liquidity and capital structure on the financial performance of Cement sector firm. Capital structure and liquidity both play a vital role in growth and profitability of the firm. The data of fifteen cement sector firms were randomly analyzed, for the period of 2008 to 2014. The statistical approaches i.e. correlation, fixed effect, random effect and hausman tests were applied. The results indicated that all capital structure variables, i.e. Debt to equity, debt ratio, funded capital ratio and Funded debt ratio has negative relationship with firm financial performance of these selected cement sector firms. The results also indicated that liquidity proxies, i.e. quick ratio and current ratio have significant positive impact on the financial performance of these cement sector firms. On the bases of the findings of this study it is suggested that these firm’s manager should take care of its capital structure proxies as it negatively impacting its financial performance. On the bases of findings, it is also advised that these managers should further improve the mechanism of liquidity.

Working Capital (WC) can be defined in different ways: a) the difference between current assets and current liabilities [Preve & Sarria-Allende, 2010]; b) as a ratio Current Assets/Current Liabilities [de Jaime Eslava, 2010] c) as a measure of operating days [Filbeck, and Krueger, 2005], etcetera. However, we will consider the concept of Net Working Capital as a function of sales [Hill et al, 2010; Aktas et al., 2014]:

What people are not aware of is that working capital management is in itself comparatively candid, to make certain that the company is competent enough to actually fund the difference between short-range assets & short-range liabilities. In reality, even so, working capital management has fairly become the weakness of scores of finance companies, with many CFOs efforts to recognize core/centre working capital drive forces and the suitable level or stage of working capital. Which is the reason; companies can be minimal in their capability to experience and survive unforeseen or unfavorable events and see to it, that the cash or money is readily on hand as it is necessary, in spite of the situation or circumstances. So, by

Companies aspire to maintain their cash at a desirable level in order to offset liabilities on maturity and the availability of production materials required by the business to provide customers’ needs, indicates the importance of working capital. This paper seeks to examine the importance of working capital to a business. By definition, in order for a business to conduct its daily operations, such as payment of wages, the purchase of raw materials, it requires funds which are referred to as working capital which also covers overhead costs. In simple terms, working capital is money available to a business for its day-to-day operations. Working capital can be sub-divided into two areas, that is, regular working capital and short-term working capital.