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Working capital - Essay Example
Author : erdmanconner
Pages 13 (3263 words)
Working capital(Mcmenamim,1999) is defined as the difference between total assets and total liabilities. Working capital is one of the financial statement ratios that users of the financial statements analyse to determine whether the business is going on a straight an beautiful path of continuous net income for the past year or years of operation.
Accounts receivable analysis is very important for cash is the lifeblood of the company. Accounts receivable must be converted to cash as soon as possible. This is where the AVERAGE COLLECTION PERIOD financial management tool is used regularly.
The longer the average collection period, the lesser the liquidity ratio will be. The average collection period is dependent on the accounts receivable customers' ability to pay. To go deeper into the analysis, Ability to pay is dependent on the accounts receivable clients' liquidity. A client that has just lost his or her job will have difficulty to pay your accounts receivable. A customer that has just run away because such customer has not intention of paying you when you will both meet will also affect the average collection period. When the average collection period is decreased, then the availability of the cash will increase liquidity. The increase in liquidity will result to a better financial statement. A better financial statement picture will increase the company's probability for the bank's approval of its long-term loan.
It also follows that sales are generated through the use of two methods. Cash sales are the first method of sales generation. ...