May 2, 2017 By Edward Brown
Working Capital Management are divided into the management of assets
Working Capital Management decisions are divided into the management of assets (investments) and liabilities (sources of financing), in the long-term and the short-term. It is common knowledge that a firm’s value cannot be maximized in the long run unless it survives the short run. Firms fail most often because they are unable to meet their working capital needs; consequently, sound working capital management is a requisite for firm survival.
About 60 percent of a financial manager’s time is devoted to working capital management, and many of the potential employees in finance-related fields will find out that their first assignment on the job will involve working capital. For these reasons, working capital policy and management is an essential topic of study. In many text books working capital refers to current assets, and net Working Capital Management is defined as current assets minus current liabilities.
That’s why they have to rely heavily on short-term debt solutions, most of which are closely associated with cash funding. However, limited access to equity and dependence on short-term debt causes a rise in the demand of a small firm’s cash flow, decreases liquidity, and grows financial leverage-all of which can lead to an increased financial risk of passing credit.
Moreover, small businesses may face trouble in raising short-term debt and not getting enough support to secure the long-term debt required to enhance their financial status and liquidity, and minimize their credit risk. Working Capital Finance can play a key role in addressing this problem, especially by putting debt conditions that assure to keep a firm’s credit risk at the lowest.
The very name Business Capital Loans, says it all. They are loans that provide one with the working capital to keep their business going till it is able to stand on its feet. This means that till you can cover all the operating expenses out of the revenue from your business you are all but insulated from the daily expenditure. It is a common fact that a number of businesses fail because they do not have the benefit of revenue to stay afloat. Working capital funds or loans provide the much needed cash to pay the rent, wages of employees, inventory expenses, utilities, and even the marketing expenses amongst other things.
A proper Inventory Finance is one in which you can draw down on a satisfactory level of your inventory value and repaid it as you replenish capital via account receivable and cash collections. Your success in achieving a proper inventory financing component in your overall business financing in effect optimizes your working capital to the extent you need to.
Your inventory financing arrangement is reflected in a type of document generally known as borrowing base certificate. We also advise our clients that it is highly preferable to have a strong handle on your inventory reporting, and also you should preferably be using some sort of a perpetual inventory accounting system.
Managing and getting working capital are two different things, and worrying about cash flow financing and what type of lending and loans are out there is of course another, and probably the issue that concerns your firm most. Let’s looks at some key issues around sourcing working capital for your business, although we are quite sure our information applies universally. How you have managed or are managing your internal financing is directly related to what solutions you have available.
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