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BSc Accounting and Finance: Financial Management - Essay Example

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BSc Accounting and Finance: Financial Management

In order to understand the value of working capital for modern businesses it would be necessary to describe the key elements of the particular concept. Then its role in the development of business activities will be made clear. In accordance with Van Horne et al the term ‘working capital’ is usually described as the current assets of the organization. However, this description is not fully accurate.
Indeed, working capital reflects the organization’s current assets but its form is not standardized. In fact, working capital can be classified by referring either: a) to its components or
b) the time. In the context of its components, the working capital is characterized as ‘cash, inventory or receivables’.
On the other hand, working capital can be used for serving either long term organizational needs – in this case is characterized as permanent working capital – or short term needs; in the last case, the working capital is characterized as temporary working capital and reflects the current assets used for covering emergent organizational needs. The key differentiation between the permanent and the temporary working capital is that the former is likely to be standardized while the latter is differentiated in accordance with the seasonal needs of the organization....
Indeed, working capital reflects the organization’s current assets but its form is not standardized. In fact, working capital can be classified by referring either: a) to its components or b) the time. In the context of its components, the working capital is characterized as ‘cash, inventory or receivables’ (Van Horne et al. 2008, p.209). On the other hand, working capital can be used for serving either long term organizational needs – in this case is characterized as permanent working capital – or short term needs (Van Horne et al. 2008); in the last case, the working capital is characterized as temporary working capital and reflects the current assets used for covering emergent organizational needs. The key differentiation between the permanent and the temporary working capital is that the former is likely to be standardized while the latter is differentiated in accordance with the seasonal needs of the organization (Van Horne et al. 222008). 2.1 Reasons for the value of working capital management As explained above, working capital reflects the current assets of the organization. The value of working capital is not equal for organizations of different sizes. In the study of Jain (2004) it is explained that working capital is of particular importance for small and medium enterprises. These enterprises face difficulties in accessing institutional financing schemes (Jain 2004). Therefore, they are likely to depend highly on working capital, i.e. the funds available for the support of daily operations. It is implied that in small and medium sizes emphasis is given on temporary working capital while in large firms the permanent working capital is likely to be most appreciated by the organizations’ stakeholders. At this point the following issue ...Show more

Summary

Current paper reviews the value of working capital management for modern organization; reference is made to the common characteristics of working capital and its common use for developing critical business decisions. At the same time, the practices available for the management of working capital are presented and evaluated. …
Author : eddie81
BSc Accounting and Finance: Financial Management essay example
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