Minimizing Working Capital Essay

1488 Words Jul 18th, 2014 6 Pages
MINIMIZING WORKING CAPITAL In the finance world, all successful firms efficiently manage their own working capital in many different ways. The term working capital originated with an old Yankee peddler who would load up his wagon and go off to peddle his merchandise (wares) for sale. This merchandise was called working capital because it was what he actually sold or turned a profit on to produce his profits. The wagon and the horse used are considered his fixed assets. He generally owned the horse and wagon, so those were always considered financed with equity capital, but his merchandise was always bought on credit, which was just like borrowing from the bank (his supplier). The more trips this peddler made each year, the faster his …show more content…
When we put working capital, this shows people how important working capital management is in the business market. When looking at working capital management, we must look at different policies a company uses when keeping their working capital minimized. The policies and of working capital are: current asset investment policies, current asset financing policies, cash conversion cycle, cash budget, cash and marketable securities, inventories, accounts receivable, accounts payable, bank loans, commercial paper, accruals, short-term financing. When a company is tying all of the policies and procedures together, their decisions are normally made within the context of the company's overall financial plan. (The Economics Times, 2011) Companies either borrow short-term loans or use internals cash accruals to procure raw materials and to meet day-to-day requirements. These loans are paid once the cash is received from customers. The lesser the number of days in which the company earns back the cash invested in operating activities, better is its working capital management. Companies, which have smaller working capital cycles ten to deliver better profitability since their short-term borrowing requirement is lower compared with firms that have longer working capital cycles. Working capital efficiency assumes greater significance during tough economic situations. During a low-growth

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