Working Capital Management Assignment Answers
Working Capital Management Homework Answers at Myhomeworkhelp.com
Working capital management is the managerial accounting strategy that is designed for monitoring and utilizing the two major components of working capital of a company: current liabilities and current assets. This basic definition is important for your working capital management assignment answers. Its main purpose is making sure that a sufficient cash flow is maintained for meeting its short-term debt obligations and operating costs.
Breaking down the concept
Generally, working capital management involves monitoring of cash flows, liabilities and assets through ratio analysis of operating expenses’ key elements, including working capital ratio, inventory turnover ratio and collection ratio. If the working capital management is efficient, it is helpful for smooth financial operation of a company. It is also helpful in improving the profitability and earnings of a company. Working capital management also includes management of accounts payables and accounts receivables along with inventory management.
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Importance of working capital management
The working capital represents the net current assets that are available for the day-to-day operation of a business. Several businesses might appear profitable but might have to cease trading because they are unable to meet the short-term obligations. To remain in business, a successful working capital management is essential. It requires great care because of the potential interaction between the components.
If you have to write about the importance of working capital management in your working capital management homework answers, you need to consider the following points:
- For some companies, the current assets constitute a majority of the total assets
- Failure in controlling working capital leads to failure in managing liquidity. This is one of main causes of corporate collapse
- As compared to accounting profits, shareholder wealth is related more closely to generation of cash.
Objectives of working capital management
Ensuring liquidity is a major objective of working capital management. An insufficient working capital would mean that the business is unable to meet its obligations, which results in late payments. Non-payment can result in compulsory liquidation. Maintaining profitability is another objective. There is little or no return on funds that are tied up in working capital.
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