managing current assets and liabilities

Topics: Corporate finance, Working capital, Finance Pages: 8 (1963 words) Published: January 18, 2015
All businesses need cash to survive
• Cash is needed to:
– Invest in fixed assets
– Pay suppliers and employees
– Fund overheads and other fixed costs
– Pay tax due to the Government

Managing working capital effectively is, therefore, a
vital part of making sure the business has enough cash
to continue

Managing Current Assets and Liabilities is nothing new to us. We practice it everyday without us notice it. Let us assume you want to reward your self by buying a new car. What are the things you consider? Shall I buy it paying by cash or installment basis? If I pay it by cash, a large amount of my savings will go to that car sacrificing other things I want to buy also. But if I pay it by installment, I have to consider the end of the payment total amount against cash price. I also have to consider whether I have enough salary to pay it by monthly for a period of time. I also have to consider whether I can continue receiving that particular amount until the duration of my monthly payment. This paper will try to present a good picture of how to manage our current assets and liabilities.

To begin with, Current assets is defined as company owned resources with a considerable value that is expected to be converted into cash in a period of less than one year in the normal course of business. These includes cash, inventory, accounts receivable, prepaid expenses, and short-term marketable securities and other assets that can readily be converted into cash within one year. On the other hand, current liabilities are company’s debts and loans or obligations that must be paid back to the lender within one year or less. This includes accounts payable , accrued expenses, and current portion of long term debts or loans. And if you compare the totals of these two groups of items, the difference is called the company’s working capital. What has working capital management has to do with these two groups of items? Working capital is the cash needed to

pay for the daytoday operation of the
Danger of Overtrading
Overtrading happens when a
business tries to do too much, too quickly with too little long-term capital

Overtrading represents an imbalance between the
orders a business accepts and the means it has to fulfill
• Overtrading happens when a business takes on
customer orders, but does not have enough current
assets, or working capital, to meet these demands
• Overtrading is particularly common in young, rapidly
expanding businesses. It can be extremely serious,
even fatal to the business

The two main objectives of working capital management is to increase the profitability of a company and to make sure that it has enough cash to pay or meet its short-term obligations as the due dates of these loans comes near. Working capital of a company can be classified as Aggressive, Moderate or Conservative. An Aggressive working capital means a company chooses to operate its daily business activities by providing lower level of inventory, accounts receivable, and cash. It may increase profitability because less cash is invested into its inventory,. However, it will also increase the risk of possible cash shortages or running out of inventories that may result in less revenues. A Conservative working capital means maintaining a larger cash balance, and bringing the cash surplus into a more profitable business activities; giving flexible terms for credit customers; or having high level of inventories. However, there is less profit in this class. A Moderate class means it is between the Aggressive and the Conservative class.

The two main objectives of working capital management are to increase the profitability of a company and to ensure that it has sufficient liquidity to meet short-term obligations as they fall due and so continue in business (Pass and Pike 1984).

The heart of a successful business organization depends on how...

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