The ability of firms to manage short term debts and expenditures can be calculated with the formula in which value of current assets is deducted from the total value of current liabilities. If current assets are less than current liabilities we can say that entity has a working capital deficiency and if it assets are more than liabilities it shows entity is able to manage its debts and operational expenses. Working capital management helps companies to make short term decisions. The management involves different policies whose aim is to manage current assets and short term financing.
Management of assets involves cash management, inventory and debtors management. Cash management refers to the availability of cash for business to meet day to day expense. Inventory Management which includes maintaining the level of inventory to meet daily production schedule without interruption. This will lower the reordering cost which subsequently increases the cash flows. Debtors management refers to the developing of credit policy for customers which will attract customers ,once customers are satisfied and willing to the credit policies of the entity this will increase revenue as well as Return on Capital.
Short term financing involves devising appropriate source of financing as the inventory used by an entity is usually financed by suppliers or banks .Most firms find the need of short term financing because cash flow from operations may not be sufficient for the growth of firms financing needs.
It is very important to manage the seasonal effects on working capital. Work capital of seasonal businesses show drastic changes during peak and off season. This fluctuation is dependent on the ability of the firm to manage its working capital. As explained by Rene Agredano in his article that to ensure efficient working capital a firm should keep track of its accounts receivables during peak season and avoid overspending in off season. IF we take an example of any seasonal business