Impacts of Working Capital
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Institution
Impacts of Working Capital
Working capital includes the inventory and cash liquidities of a company. Working capital can contribute either positively or negatively to the organization. A positive contribution is when a firm can settle its short-term liabilities. A negative working capital, on the contrary, cannot meet the same demands. As a result, the company becomes overleveraged, struggles to remain competitive, and has accumulated bills. For these reasons, analysts endeavor to reduce the undesirable aspect with it. Most companies today are finding it hard to maintain the working capital considering the high expenditures. Given these scenarios, inventory management and cash conversion cycle are essential topics to inform decision making for business operations.
The cash conversion cycle (CCC) plays a crucial role in organizational decisions. In essence, it measures the rate at which a firm can convert their funds to inventory’s and reverse into money. The process looks at the time taken to retail stocks, collect receivables, and settle bills without missing the payment deadlines. The cycle considers the period between the disbursing and collection of funds by the institution. In so doing, it can see how long the cash lasts to carry its operations (Tarver, 2019, par 1). The management can proceed to make appropriate decisions about when to purchase inventories or sell them for cash. Generally, the cash conversion cycle shows how a firm’s working capital management.
Another aspect of the working capital is inventory management. This component controls the ordering, storage, and utilization of the production material for its company. The process incurs costs in tracking, storing, insuring the inventory. Mismanagement of the stocks can result in financial losses for a business. Successful stock management entails developing a purchasing plan to ensure that the required inventories are available. The method also helps to monitor the existing list and its utilization to avoid losing money (Campbell, 2018, 3). One of the inventory management techniques is the Just-in-time (JIT) strategy, which delivers the products as required rather than having high inventory levels. Another typical example is material requirement planning (MRP), where industries deliver goods based on market trends. Overall, the process aims to minimize the cost of holding inventory by guiding the management on when to purchase or replenish them.
References
Campbell, C. (2018, December 30). You’re probably losing money by not using these 8 inventory management techniques.Shopify. Retrieved from
Tarver, E. (2019, June 27). What does cash conversion cycle (CCC) say about a company’s management?Investopedia. Retrieved from