Week 7 Discussion: Working Capital Management 252885

Week 7 Discussion Working Capital Management Turnitin Is Active

Many newly minted college graduates work in positions that focus on working capital management, particularly in small businesses in which most new jobs are created in today's economy. To prepare for this Discussion: Shared Practice, select two of the following components of working capital management: the cash conversion cycle, the cash budget, inventory management, and credit policies. Think about scenarios in which your selected topics were important for informing decision making. Be sure to review the video links above and conduct additional research using academically reviewed materials, and your professional experience on working capital concepts to help develop your scenarios . Support your discussion with appropriate examples including numerical examples as necessary.

Paper For Above instruction

Effective working capital management is essential for the financial health and operational efficiency of any business, especially small enterprises where resource constraints are more pronounced. In this discussion, I focus on two critical components of working capital management: the cash conversion cycle and credit policies. These areas significantly influence a firm's liquidity, profitability, and overall strategic decision-making, especially in scenarios involving limited cash flow and customer credit risk.

The Cash Conversion Cycle

The cash conversion cycle (CCC) measures the time span between a firm's outlay of cash for inventory and receiving cash from customers. It encompasses inventory days, accounts receivable days, and accounts payable days. Effective management of the CCC helps companies optimize cash flow, reduce the need for external financing, and improve liquidity. For example, a small manufacturing firm may analyze its CCC to identify bottlenecks in receivables collection or inventory turnover.

Consider a hypothetical scenario where a company holds inventory for 30 days, extends credit to customers for an average of 45 days, and delays payments to suppliers for 40 days. The CCC would be calculated as:

CCC = Inventory Days + Receivables Days – Payables Days = 30 + 45 – 40 = 35 days

In this case, the business effectively ties up cash for 35 days. To reduce this cycle, the firm might negotiate faster receivables collection terms or optimize inventory levels. For example, shortening receivables to 30 days results in a CCC of 20 days, freeing up cash and improving liquidity.

Credit Policies

Credit policy management involves defining how and when a firm extends credit to customers, assessing creditworthiness, and managing collections. Well-designed policies can boost sales while minimizing bad debts and delayed payments. For instance, a retail business might have a strict policy of only extending credit to customers with established credit histories and a history of prompt payments.

Imagine a scenario where a firm offers net 30-day credit terms to customers but experiences high late payments, resulting in cash flow issues. In response, the firm implements stricter credit checks and reduces credit periods to net 15 days. As a result, late payments decrease from 20% to 5%, significantly improving cash inflows. Conversely, overly restrictive credit policies could deter customers, decreasing sales, so a balance must be struck.

Numerical examples illustrate that tightening credit policies often improve cash flow at the potential expense of sales volume. For example, if sales decrease by 10% but late payments are cut by 15%, the net effect could be positive for liquidity. This trade-off underscores the importance of strategic credit management aligned with overall business objectives.

Conclusion

Both the cash conversion cycle and credit policies profoundly impact a firm’s working capital position. Efficient management of the CCC reduces the cash tied up in operations, improving liquidity and reducing financing costs. Simultaneously, well-structured credit policies balance sales growth with cash flow stability. Small businesses, in particular, benefit from closely monitoring these components, as their limited resources make working capital management crucial for survival and growth.

By analyzing scenarios with real-world data and adjusting policies accordingly, small firms can enhance their operational effectiveness and financial stability. Practical application of these concepts fosters a proactive approach to managing liquidity, ensuring that businesses remain agile and competitive in dynamic economic environments.

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Gill, A., Bansal, H. S., & Kumar, N. (2020). Working Capital Management: A Contemporary Review. Journal of Applied Finance & Banking, 10(3), 1–15.
• Harris, J. (2021). Improving Working Capital Management in Small and Medium Enterprises. Small Business Economics, 57(2), 555-572.
• Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2020). Fundamentals of Corporate Finance. McGraw-Hill Education.
• Shim, J. K., & Siegel, J. G. (2018). Budgeting and Financial Management. Barrons Educational Series.
• Smith, B., & Smithson, R. (2019). Managing Accounts Receivable and Credit Policies: Strategies for Small Business. Journal of Small Business Finance, 25(4), 451–468.
• Uyar, A. (2020). Cash Conversion Cycle and Firm Performance: Evidence from Turkey. International Journal of Economics and Financial Issues, 10(4), 81–89.
• Van Horne, J. C., & Wachowicz, J. M. (2017). Fundamentals of Financial Management. Pearson.
• Waisanen, E. (2018). Inventory Management and Cost Control in Small Firms. Journal of Business Venturing, 33(5), 611–629.
• Zaribafour, S., & Alipour, A. (2019). The Impact of Credit Policy on the Liquidity of Small Businesses. International Journal of Financial Studies, 7(2), 30.