Working Capital Management Techniques
Techniques that are effective are rather needed in order to ensure that a business will run properly. The working capital of a business is also expected to be managed correctly.
Therefore, we cannot emphasize the big need to know the working capital management techniques to assure business success.
Working capital is an essential aspect of a business that must not be overlooked by business owners. If managed properly, there is a big chance that the business will also prosper.
What Working Capital Is
Working capital is the fund that is required to meet all the daily expenses of a certain enterprise. For finance managers, working capital is that fund being locked up in the current assets, the reason why they look for a liquidity support from net working capital which is also equal to excess of the current assets over the current liabilities.
What Working Capital Management Techniques Are
Basically, the working capital techniques are being used by the business managers to help them to effectively manage the working capital. Management of the working capital will also mean primarily managing the current assets. Techniques such as
- Intersection of the carrying and shortage cost
- Financing policy of the working capital
- Cash budgeting
- Economic Order Quantity or EOQ
- Just In Time or JIT
These are all being used so that various components of the working capital such as inventories, cash, debtors are many others are properly managed.
Intersection of the Carrying and Shortage Cost and Financing Policy of the Working Capital
One essential method to find the optimum working capital level is through the intersection point of carrying and shortage cost through graphical representation and at this certain point, the cost of shortage will still be at its minimum. Meanwhile, there are two viz to which financial policy of the working capital can be separated into. The working capital that is permanent is the working capital’s level which is regularly maintained and required. O n the other hand, the working capital that is temporary is the portion of the working capital which experiences fluctuation most of the time. During good seasons, it is high and low when the seasons are bad. Financing generally comes in two kinds, namely the short and long term financing.
Cash Budgeting, EOQ and JIT
One of the working capital management techniques is cash budgeting. Cash budgeting also helps in keeping the optimum cash level of a business. Cash budgeting will involve requirements estimation of the cash through estimating the fore-coming payments and receipts. As for EOQ, it is a model that is famous when it comes to inventories management. Economic Order Quantity is a great help for inventory managers to know the correct quantity which must be ordered taking into consideration factors such as ordering costs, carrying costs, annual sales and purchase price. JIT or Just-in-time is also an essential technique which brings paradigm shift in inventories management. Although inventory costs are not abolished, they are at least reduced. JIT means getting raw material or the manufacturing product just when the customer requires them.
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