A discussion relating to working capital cycle, methods of managing working capital, working capital management in UK companies and suggestions for improvement has been presented below.
The working capital of the business is defined as the net of current assets over current liabilities. It is an important liquidity measure of the firm. The current assets include not only cash, receivables but also inventories as it can be easily liquidated whereas the current liabilities include short term loans and creditors (University of California, n.d.). A business with scarce working capital faces difficulty in meeting its short term obligations from the available cash resources if there is a sudden or continuous fall in sales. Therefore, it is important to maintain an optimum amount of working capital in the business and it must be carefully monitored by the managers (Nix & McFetridge, n.d.).
Working capital forms an important part of a firm’s operations. Maintaining an ideal level of inventory ensures that the firm does not have to face the problem of material deficit in meeting its production targets. Similarly the receivables figure in the balance sheet indicates the willingness of the firm to extend goods on credit. As credit sale is risky the management must be careful in the choice of debtors.
Working capital consists of current assets like cash, inventory and current liability like creditors and short term loans. The pattern of all the above components of working capital varies with the business cycle. When there is a fall in the market demand there is a rise in the stock of finished goods. Later when this fall in demand takes the form of recession the firm lowers the stock of inventories, delays the payment of loans and accelerates the realization of receivables. This implies that with the worsening of the recession there is a decrease in the working capital. Therefore the efficient management of working