Question

Describe the components of working capital and how firms manage them in at least 200 words

Answer 1

The Major components of the working capital and how firm manages them are as follows:

1.) Accounts Receivables - These are the the receivables which company are likely to receive from their debtors for the credit sale or services provided, these are the current assets for the company and daily sales outstanding is the major tool through which the company handles there accounts receivables, it is a metric in which the total days are reflected when the original sale was made and give clear picture of the aging of the debtors and help company to use these revenues to pay for it's operational cost of the business and it is appear on the assets side of the balance sheet

2.) Accounts payable - It is related to the payments which are to be paid to the creditors of the company with in the 1 year time gap and it is the current liabilities of the business and it is the main component of the working capital and up to a reasonable period of time usually company provide shorter time gap of recovering accounts receivables from debtors and in this way establish good relationship between the suppliers and creditors.

3.) Inventory - It is the breath of the operational activities in any business and it's a second most liquid item in the business that convert revenues for the business and also known as stock and Inventory turnover ratio is the formula to get the signals of the strengths of the sales and also tells about the efficiency of purchasing the stock and through the high ratio we get to know that the company is excessively using the working capital and with the low ratio the company is losing its sale.This item is shown in assets side in the balancesheet.