2023年Explainwhyworkingcapitalmanagementhasbecome.doc
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1、Explain why working capital management has become increasingly important in the current business environment.In a competitive business world, successful organizations understand the importance of critical-thinking in the decision-making process. To make sound business decisions, organizations must c
2、ombine strategic planning with comprehensive data analysis, which includes the evaluation of financial and non-financial records and processes. Management and those involved with maintaining the companys financial health use a variety of tools, methodologies, and performance metrics to gain a better
3、 understanding of the companys current financial state, create reliable forecasts, and formulate and implement solutions for the company. Organizational leaders realize that to make the most optimal decision, the company has to fully evaluate all aspects of the companys operations including policies
4、 and procedures. The working capital policy is imperative to a companys success because the policy serves as a strategy on how the organization can maximize its resources. “The working capital policy is the firms policy about its working capital level and how its working capital should be financed d
5、ecisions about how much to keep in its cash account, what level of inventory to maintain, and how much to allow receivables to build up” (Danh, 1999). The working capital policy also includes handling creditors, debtors, inventory, and possible sources of additional working capital. The working capi
6、tal policy will assist companies in making sound business decisions on how it shall finance its existing assets. Good working capital management is important. According to the Treasury of New Zealands (2023) website, if a company is “operating with more working capital than is necessary, this over-i
7、nvestment represents an unnecessary cost.” The website further added that excess working capital means “operating inefficiencies.” Even with excess assets, it is considered inefficient because the assets can be used, invested, and generate additional income for the company. The following are just so
8、me of the various components of a working capital:Current Assets Liquid Assets (cash and bank deposits) Inventory Debtors and Receivables Current Liabilities Bank Overdraft Creditors and Payables Other Short Term Liabilities Provide at least two examples of organizations that have good working capit
9、al management policies, and two examples of organizations with poor working capital management policies. Be sure to explain why the policies of your selected organizations are effective and ineffective.Some of the companies that have been successful at managing their working capital are Ford Motor,
10、Dell, Kitty Hawk, General Motors, Texas Instruments, Prometheus Print, etc. On the other hand, companies that have been unsusccessful at managing their working capital are Larrys Market of Seattle and Dephi.SuccessfulTexas Instruments Factoring of Receivables (Factoring) Invoice factoring, also know
11、n as factoring or accounts receivable factoring, is a financial option available to organizations. By factoring, businesses are able to liquidate outstanding receivables to financial institutions, referred to as factors, for immediate cash funding. Business organizations that factor out their receiv
12、ables sell their outstanding receivables to factors. The organizations are able to have quick access to cash; however, the cash received for the receivables sold is less than the face value of the total receivables sold. In turn, the factors (financial institutions) perform the collection for these
13、outstanding invoices and potentially receive the full amount when the receivable is actually due. Business organizations factoring out their receivables do not have to wait until the invoices are past due. Although still considered unconventional form of financing, many organizations opt to factor o
14、ut their receivables because of the convenience factoring provides. Organizations can shorten the billing cycles, improve cash conversion cycles, and increase liquidity by factoring accounts receivables. According to Invoice Financials (2023) website, some of the benefits of factoring are: Obtain fu
15、nding for your outstanding receivables within 24 hours. Accelerate cash flow, make payroll, and fulfill new orders. Offer better terms to large customers and increase sales. Extend credit to large customers without asking for COD. No new debt is created. Factoring is not a loan. Pay your suppliers f
16、aster; take advantage of early pay discounts. Improve your business cash flow and credit rating. Eliminate long billing cycles and the hassle of collecting money. Instant credit guarantees for new customers. No obligations and no binding contracts. The factors decision to offer or accept financing w
17、ill be based on the customers credit worthiness (open receivables) as opposed to the companys financial statement. Therefore, eliminating the need for audited financial statements. Organizations just need to prepare invoices and supporting documents for the outstanding invoices that will be sold. Te
18、xas Instrument (TI), designer/supplier of digital signal processing solutions and more popularly known as the manufacturer/distributor of scientific calculators, have been factoring its outstanding receivables since 1990 (Quickel, 1993). According to Quickel, Texas Instruments sold receivables aroun
19、d the 1990s were averaging between $150 million o $175 million per year. By selling a percentage of its total receivables as opposed to individual receivables, Texas Instrument can ensure access to needed cash as well as “maintaining contact with its customers” (Quickel, 1993). Prometheus Print Invo
20、ice DiscountingPrometheus Print is a printing company that uses invoice discounting as a means of protecting cash flows. (Meade, 2023). Prometheus uses The Royal Bank of Scotland Group (RBS) for their invoice discounting after giving the customer 90 days to pay in full and RBS then collects on the b
21、ad debt or turn it over for legal action (Meade, 2023). Prometheus switched to invoice discounting from factoring after factoring provided the necessary flow of working capital to establish the company (Meade, 2023). Invoice discounting offers the real cash flow benefits that factoring offers but wi
22、thout the loss of control of the sales ledger and existing methods of credit control within the company (The Banking Liaison Group Ltd, 2023). This system can be used by companies to improve cash flow, but it can also be used to reduce administration overheads (Moore, 2023).Dell, Inc. Cash Conversio
23、n Cycle (CCC) The cash conversion cycle, also known as cash cycle and working capital days, is one form of early warning system for organizations financial health. Cash conversion cycle is an important financial tool or approach in determining the companys financial position because it allows organi
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