WORKING CAPITAL POLICY

Working Capital Policy

Working Capital Policy

Introduction

Working Capital is well thought-out to be the life giving force for any economic unit and therefore; its management is categorized among the most important functions of corporate management. Every organization, whether profit oriented or non profit, and irrespective of size and nature of business, requires a sufficient amount of working capital for the operations of the business. The management of such resources is considered as the most critical factor for maintaining liquidity, solvency, continued existence and profitability of the business. Furthermore, efficient management of working capital may be important to create value for the shareholders. This study is related to the working capital policy of National Express which is an important factor for the financial performance of the company as it shows the financial stability in the company.

Working Capital Policy

Working capital management efficiency is imperative for firms specifically in the transport sector, where a major part of assets is composed of current assets. This may therefore; directly affect the profitability and liquidity of firms. Firms are likely to fail and may face bankruptcy where working capital management is not given due consideration. Excessive levels of current assets may result in low levels of returns such as return on investment (ROI) for firms. In contrast, firms with a lesser amount of current assets might be facing difficulties in maintaining smooth operations (Paul, 2009, 139-152).

One of the major functions of manufacturing firms is the production of goods. This function in most firms depends largely on the Working Capital Management. Management of fixed assets falls within the realm of capital budgeting while the management of Working Capital is a continuing function which involves control and flow of financial resources circulating in the firm in one form or the other (Downes and Goodman, 1998, 705-706). Regarding individual items of working capital, if the forecast of a firm is perfect than it would be holding optimal level of cash required for making payments, adequate inventories for meeting the production and sale requirements and the amount of accounts receivable as per the optimal credit policy (Andrews, 1994, 193-218).

The working capital policies are associated with decisions made by directors of finance in relation to levels of assets and liabilities that are set to perform the operations of the company. These levels have a direct impact on the binomial risk - business profitability. The bases underlying the association of the levels of assets and liabilities with the levels of operation, the contents of each of the working capital policies, investment and financing in the short term as well as their impact on the alternative risk that is the profitability.

Important Factors

Cash management

Having a good cash management is the cornerstone of good business management. You have to manage its cash flow growth as a recession, in times as fast-growing stable. At each stage, management resources are available to leaders. The basis of cash management is the management of working capital needs. The working capital used to finance the operating cycle of the ...