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Cash and Working Capital - Essay Example

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Cash and Working Capital

These four phases consist of the following management requirements; cash management which is identifying the cash balance available to run the day to day expenses of the business or firm so as to reduce the cash holding costs (Padachi, 2012). Inventory management is identifying the inventory levels that will enable the business to run smoothly without investment in raw materials. This requires the lead times being lowered to reduce Work in Process (WIP) and the finished goods should also be kept as low as possible. This will lead to the reduction of the reordering costs and hence increase cash flow. Debtor’s management this requires identifying the best credit mechanism for the business or the firm. The credit mechanism chosen should be able to attract customers to the firm and also make sure the firm is getting the payments on time from the credit customers. This will be optimized by increasing the revenue thus increasing the Return on Capital. Another aspect of working capital management is the Short term financing, it is achieved by identifying the most appropriate source of short term funds to run the business this can be achieved through credit granted by the supplier. It may also be necessary to use a bank loan or an overdraft (Banos-Caballera, 2010). The working capital cycle phases require short-term decisions. ...
This normally refers to the time which the firm’s money is tied up in operations and therefore working capital phase normally aims at making sure the time is as short as possible (Block-Hirt, 2008). The primary sources of short term funds Short term funds refer to money needed to run the company in a period of less than a year. They are normally used for the day to day running of the business or firm. There are a number of short term funds available to a company which require different levels of interest rate expenses, collateral and personal guarantees. This is required to provide working capital. The short term funds are used for purchasing of raw materials or finished inventories, payment of wages, salaries and other short term expenses (Brealey, 2002). The three primary sources of short term finance include trade credit, which is normally gotten from the suppliers. It is a loan in the form of goods and inventory. The credit time period is normally 15 days to 3 months and this is normally granted on the basis of good will of the purchaser. This credit facility is given buy a supplier to the buyer of goods and by a whole seller to a retailer. When the time limit is reached the credit should be paid lack of payment can lead to seizing of the goods in the inventory (Block-Hirt, 2008). Another major source of short term loans and advances is from the commercial banks. This are mainly in the form of bank overdraft from the bank which the business has an account in. the overdraft allows the business to withdraw from its current account exceeding the available cash balance. The business is charged an interest rate that is based on the amount overdrawn and the length of time overdrawn (Cleverley, 2011). The advantage of ...Show more


(Name of Institution) (Student registration) The four general phases of the working capital cycle Working capital is a measure that represents the operating liquidity available to a business or a firm. It is part of the operating capital and it is calculated as current assets minus current liabilities…
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