Question

Please describe in detail the components of working capital and how firms manage them in 200 words or more.

Answer 1

Working Capital: Apart from the investment in fixed assets, every business organization needs to invest in current assets. The Investment facilities smooth day to day operations of the business.

There are two kinds of working capital:

1) Gross Working Capital: This refers to investment in all the current assets such as cash, bills receivables, prepaid expenses, inventories etc. These current assets get converted into cash within an accounting year.

2) Net Working Capital: This refers to difference between Current Assets-Current Liabilities

There are various components of working capital which can be easily converted into cash within a period of one year.

Current Assets

1) Cash in hand/Cash at Bank

2) Inventory

3) Marketable Securities

4) Bills Receivable

5) Debtors

6) Raw Material, WIP, Finished goods inventory

7) Prepaid Expenses

Current Liabilities

1) Sundry Creditors

2) Bills Payable

3) Outstanding Expenses

4) Advance received from customers

Management of Cash & Cash Equivalents: Cash management is the key to maintain the firms’ credit rating & minimize cost-effectively manage the collection and maintain cash.

Management of Inventory:

a) Regular review of purchase and inventory system.

b) Keep a proper track of all major items of inventories.

c) Slow moving stock should be timely sold.

Management of Accounts Receivable:

a) Good receivable management

b) Proper credit policy

c) Overdue and non-payment should be closely monitored.

d) Ensuring that customers make timely payment of their invoices.

Management of Accounts Payable:

a) Proper policy and procedure must be maintained to control accounts Payable.

b) Prepare a track of accounts payable payment’s to ensure that payments are timely done.