Essay Sample on Working Capital: Risk Tolerance & Asset Availability

Introduction

The working capital, which refers to the difference between both the current assets and liabilities impacts the level of assets directly. This relationship implies that the availability of more cash accompany can maintain constitutes to the less investable cash in long-term productive assets. In this way, therefore, many companies have often decided on what particular level of working capital to maintain based on risk tolerance (Brigham & Ehrhardt, 2019). The working capitals are essential to any organization, mainly because they aid in various processes of organizational decision-making.

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The Cash Conversion Cycle, for instance, has been utilized in both the simple and complicated financial and investment decisions of the company. Ideally, this is a financial concept which is a composite metric that is regarded as the average days needed to convert a dollar invested in raw materials into a collectible dollar from a customer. In the telecommunication company that I worked for before, I encountered instances when the manager tremendously used this type of working capital for decision-making purposes. Notably, the Cash Conversion Cycle proved critical in indicating the length of the period between paying the supplier and payment reception from the customers.

As part of the decision-making process, the conversion cycle presented three fundamental determinants which include the day payable outstanding, inventory days, and days of receivable excellent. It is important to note that all the decisions done by the financial managers regarding this valuable resource present a considerable bearing regarding the performance, risk, and the market value of the companies (Brigham & Ehrhardt, 2019). In most cases, the business decisions made through the cash cycle as a working capital are fundamentally focused towards three primary capital structure, capital budgeting, and management of working capital.

Another type of working capital that is essential for business decisions is the inventory management. Brigham & Ehrhardt (2019) mentions that for a businesses to succeed, they must have the right tools and guidance to perform the inventory management systems that allow the managers to make appropriate business decisions. The inventory management allows the business and management to know everything about the customers (Brigham & Ehrhardt, 2019). These may include customer-buying patterns, sales data, and the delivery time frame. In the company that I worked for before, the inventory management created a suitable platform through which managers were able to embrace excellent problem-solving abilities, increase efficiency, and enhance the optimal resource use. Regarding an enhanced problem-solving aspect, it is essential to note that the inventory management systems can allow organizations to streamline how they deal with an inventory. Through inventory management, the business gets the opportunity to have more control and transparency over the amount of goods produced and sold. A well-structured and managed inventory system in our company allowed the company to identify problem areas within their supply chain, and this included the bottlenecks, thefts as well as other inefficiencies that may be presented.

Having an inventory system that can track the business inventory in real-time is vital for stock control and maintenance. The businesses are, therefore, able to keep the investments in the inventory to a minimum. The business may also experience liquidity problems when considerably more amount of money, particularly if the sales decline (Brigham & Ehrhardt, 2019). Various factors, such as the opportunity cost must be considered when thinking about an investment option. This consideration is based on the fact that excess cash could always be put to better utilization everywhere, and this may include earning interests from a savings account.

References

Brigham, E. F., & Ehrhardt, M. C. (2019). Financial management: Theory and practice. Mason, Ohio: South-Western