WORKING CAPITAL MANAGEMENT

Working Capital Management

Memo

To:The Vice President (Strategy)

From:Name

Date:22/02/2013

Re: Management Of Working Capital

Working Capital Management

Introduction

Probably one of the most difficult tasks faced by the small-business owner is the proper management of working capital. In the normal course of conducting business, we accumulate current liabilities that often must be paid in lump sums: Rent, insurance, payroll taxes, sales taxes, and accounts payable are a few examples. Revenues, on the other hand, often flow in a sporadic but somewhat steady stream, and it can be difficult to equate the steady income stream to a lumpy payment schedule.

Discussion

Working capital management is our ability to effectively and efficiently control current assets and current liabilities in a manner that will provide our firm with maximum return on its assets and will minimize payments for its liabilities. Proper working capital management promotes operational efficiency, but not necessarily long-term effectiveness. Creditors look at excess liquidity as a safety margin for paying short-term debt. As owners, however, we should look at excess liquidity as an opportunity to invest in items that will increase future productivity and profitability. (Horngren, 2002)

We will discuss working capital management in general terms to see the relationship between these items. Once we have covered the general relationships, we then will recommend specific methods of dealing with current asset management and current liabilities management.

Current assets must be managed properly. In a retail business, cash is used to buy inventory, which we plan to sell at a markup to generate a return on our cash investment. Sales are typically made for cash or on credit. Credit sales become our accounts receivable, which are converted into cash that may be used to pay off liabilities and to purchase more inventory for sale. We can enhance productivity by investing cash in fixed assets. For the retail establishment, this may involve new display cases or computerized cash registers that assist us in controlling inventory. For a manufacturer, this investment may be in new machinery that will increase quality or speed of production. Regardless of the type of business, we always should try to manage working capital so that there is an excess of current assets over current liabilities. One reason is the possibility that some liabilities that are not currently listed as liabilities will have to be paid at the beginning of the next accounting period. (Moyer, 2009)

Note that an excess of working capital must be ...