The Need for Working Capital Management

Working capital management defines the management in the short term of the relationship between a company's current property and liabilities. The most frequent components of working capital will include inventory, receivables and payables which symbolize the working working capital (OWC) performed by way of a company usually within the calendar year. Fig. 1 below shows the discussion between these elements of OWC.

The goal of OWC management is to ensure a company has enough cash flow, measure in terms of liquidity, to meet its short term debts and continue to support its daily procedures. Most articles and books discuss the importance of OWC in conditions of obtaining an optimum balance between inventory, receivables and payables, McLaney E. and Atrill P. , Accounting: An Benefits (Prentice Hall, 2008). Abraham et al. , Accounting for Professionals, (Cengage, 2008) further expatiates upon this critical importance and declare that most organisations commit between 25 - 40% of these net assets on OWC which presents a major short term investment. However, these catalogs present a common methodology to OWC, nor consider a firm's unique dynamics, companies or size. Furthermore, this need for working capital will depend on its size and composition and will fluctuate between market sectors such as Rolls Royce Plc a processing company will place particular focus on its high inventory levels and payables unlike Uk Airways Plc a provider with no inventory. Thomas M. Krueger, An Research of Working Capital Management Results Across Companies, American Journal of Business, 2005, vol 20 offered a research based on the annual ratings of working capital management across business published in CFO newspaper. The result mentioned that there is a consistency in working capital measures within industries however the working capital actions were are not static over time. In an online article Philip McCoster (2003), Accountancy: The Need for Working Capital, (http://www. accountancy. com. pk/articles_students. asp?id=77). [Online]. (Accessed 28/03/11) agrees with this dynamic dynamics of working capital and shows this importance in more understated way that a lot of organisations are profitable on paper but are pressured to cease trading because they can not meet short-term debts. According to him, smaller businesses in particular are prone to fail especially during set up because they ignore the importance of working capital problems.

Generally the value of working capital is indisputable and whether its elements are maintained as a whole or specific, its management continues to be important for an organisation to effectively maintain its cash flow to continue procedure. But while this is most said in documents, it seems alternatively paradixocal that the truth is the importance OWC is ignore & most companies find themselves at the idea of individual bankruptcy as was the case in the receiving margin game.

As a creation supervisor in the 'Winning Margin game', I realised that the decisions I made especially in forecasting and controlling machines result was very critical to the overall amount of completed goods inventory had a need to achieve a positive OWC. This was obviously depicted in yr two when two critical decisions;

Forecasted a total production output of 11 charging $40 (appendix: Production and Sales Ideas For The Year Forward).

Purchase of two additional Draw II machines (See appendix: Balance Sheet)

This resulted to a rise in the quantity of inventory to contracted amount even though some inventory was tangled up in Work happening and Finished goods leading to a drop in functioning working capital (12 months 2 CASHFLOW Statement). Furthermore, the cash allocated to new machines also led to a drop in the operating cash flow of the business enterprise. Therefore, in true to life the production director role is tactical and has a huge effect on working capital and the entire business target but his/her decisions can only be as effective when used collaboration with other departmental minds.

2. 2 BUDGETING

McLaney E and Atrill P. , Accounting: An Benefits (Prentice Hall, 2008) identified a budget as a brief term financial plan made by a business as a fundamental element of its proper plan platform. A budget is use by managers to examine and compare between the actual from what was organized in a process known as the budget control. Employing this technique, Group E benefited from the budgetary process in many ways:

Forward thinking and id of short-term problems: During the planning procedure for year 2, we realised that people had to cover additional machine as well as additional lending options. Doing this in good time offered us time and energy to consider alternatives and chose the best course of action to use.

Improved co-ordination: Doing planning each year meant we had to co-ordinate with one another. This is crucially beneficial since it improved presence and decisions making as all activities were linked together. For example, decisions on creation depended on sales quotes, raw material supply and financing to financing it.

It provided a system of Control: At the start of each year, we'd to compare year 1 and 2 performance and set up areas of worried. This provided something of control and better planning for time 3.

It created something of authorisation: By choosing a master course of action for each year, this helped set expenditure restrictions especially when i, the production director, wanted to increase amount of machine purchased in calendar year 2 but was restricted.

The budget encouraged us to execute better: By establishing obligations to each person in the group, was beneficial to the whole team as each member's felt they had added to the entire business goals. Hence bettering the team's spirit to perform.

2. 3 Absorption Costing

Absorption costing is a way of calculating the entire end result cost by charging direct costs with a good talk about of indirect costs. The essence of absorption costing is to make priced at simpler and easier so that management can make up to date decisions. In the 'Being successful Margin' game, the utilization of this approach was good for our group in several ways:

Helpful in making end result decisions: Absorption costing approach made calculating organized sales easier and since a team we could actually make prepared decisions on creation and cash flow.

Exercising control decision: absorption costing is often used as a basis of budgeting and budget control. Therefore, it was good for the team as it created the basis of our budget and we were able to exercise control over our budget and plans

Furthermore, the strategy was particular useful to achieve efficiency since we could actually make decisions that compares different costs of doing similar things. For instance we compared the expenses of buying a Marked II or Draw III machine in 12 months 2 as well as deciding between the numerous kinds of product to create.

In addition to this, absorption costing approach was significant even as we were able to examine our team's performance. Its use made calculating yearly development cost, sales, revenue and other financial data easier. This made facilitated the process of assessing our business and team performance for just about any given calendar year.

Although widely used, in real life the utilization of absorption priced at technique will never be as simplistic as with the game. Furthermore, the approach has been criticised because of its use of history costs which are considered irrelevant in the decision making process as decisions need to reflect the near future not days gone by. Other costing techniques such as changing costing are recommended. (Words 300)

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