Assignment: Discussion Question
In this module we discussed how working capital management is involved in the financing and controlling of the current assets of the firm. Current assets include cash, marketable securities, accounts receivable, and inventory. We learned the less liquid the asset, the higher the required return. A firm must be able to manage its current assets or possibly lose its ability to survive.
The primary goal is to balance the short-term needs of the firm with the cash required. The goal is to keep as small balance as possible. An important concept of cash management is that these funds should not sit in banks and checking accounts earning nothing when the cash balances could be earning a return. If they are to be kept for a period then they should be invested in marketable securities.
Electronic funds transfers are reducing float time, thereby making it possible for firms to maximize collections as well as disbursements.
Management of accounts receivable requires development of a credit standard. This determines the amount and form of credit to be offered. An effective credit policy allows customers to purchase the company's goods while at the same time protecting the firm.
Inventory is the least liquid asset. Therefore it should earn the highest return. The use of just-in-time inventory management model (JIT) focuses on the minimization of storing inventory. By use of total quality production techniques and creating ties between suppliers and manufacturer, cost reductions can be established.
We also examined how the concept of leverage can be used to magnify returns. We also looked at the risks involved when using leverage from both a financial and operations perspective.
The management of current assets and current liabilities in the short run can lead to several challenges for the financial manager. What are some of the more common challenges or problems encountered by the firm in this regard, and what are the possible solutions? Explain your answers.