"Management of Working Capital Case Study: "George's Trains"."

"Management of Working Capital Case Study: "George's Trains"."

Introduction

The way this toy shop is being administered by Mr. George, it that even though they are doing rather well as far as their limited financial prowess is concerned; still there is considerable room for improving the working capital practices. Let's look at the positives about their strategy, their cash management strategy is really proficient and it is something that they have done rather well.

Working Capital Practices

Cash is necessary for the business as far as running simple day to day operations are concerned but on the other hand, there is considerable costs that are attached with over holding of the cash. The cost that is related to holding of the cash is that it is a current asset and the value of the case depreciates with the passage of time (Danielson & Scott, 2006). There are interest rate considerations as well that are needed to be looked at. So the way their management of cash is being carried out is really plausible and they can continue doing so for the time being.

Their inventory management is also carried out really proficiently and they have done rather well as far as taking care of the inventory is concerned. They are smart about it as they have kept the inventory at the low levels, and due to it, their handling expenses of the inventory are also being carried out rather efficiently. They need to be a bit clear about their forecast though as they roughly take up the figures from the last year and try to adjust their production as that last year's figure. They need to carry out a better forecast of their inventory. They have fair idea about their inventory and they can make sure that they keep a check on the re ordering costs of the inventory. They should keep their finished goods as low as possible. All these things are being done rather accurately by Mr. George.

There is a clear advantage of this strategy, as income tax outlays will be lower, there will be overall improvement in the asset allocation of this business. They also have to identify a credit policy that is luring to the customers, and they have to chalk out a credit policy that customer are willing to be a part of. Thus there needs to be an improvement in their capital budgeting structure. There is a word of caution as far as having low level of inventory is concerned, as it can be seen, the business does have its seasons and they rely heavily on the sales, the turnover needs to be high most of the times. Now there are instances when there might be problem in the seasons of higher demand due to their low level of inventory.

Capital Budgeting Techniques

But the problem with the lower inventory is that they as they keep cutting down all the expenses. They reflect their income to be on the higher ...