Question

Do some research on two firms in your industry or an industry in which you are interested. Can you get an idea of their working capital management policies from publicly available information? How do the two companies differ in their apparent working capital management policies? Which policy do you think is better and why?

For your second post, consider the company you work for or a company in which you are interested. Also, do some research to find some current cost estimates for various means of financing working capital. What would be your recommendation to the company for financing its working capital needs? If the information is publicly available, or if you have access to it and have permission to discuss it, how does your recommendation compare what the firm is actually doing?

For your next post, explain the cash conversion cycle (CCC). Describe the CCC for your employer or company in an industry in which you're interested. What are some specific things that your company could do to decrease your cash conversion cycle? Let's be sure to describe, in pretty specific terms, the CCC for our company and what could be done to shorten it.

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Answer 1

1. How do companies differ in their working capital management policies and which is better:

There are three kinds of working capital management policies.

a. Restricted policy: The current assets requires low level of working capital as these are low level of their availability and the liquidity reserves are invested so that revenue is generated without keeping them idle. But, there is more scope for contingencies here in this policy.

b. Relaxed policy: The current assets require working capital as the availability is present and the liquidity reserves are not further invested with no additional revenue but there is safe for the contingencies.

c. Moderate policy : Which adopts between restricted and relaxed policies and I think this is the better ones as it covers both revenue generation and contingencies.

2. Recommendations for financing its financial working capital:

The value of accounts receivable, inventory and some current assets should be executed properly because holding inventory for longer periods and waiting for receivables will be a cash outflow for the companies which will later lead to to cash flow crunch that which should be happening.

Also provision of credit and accounts payable should also be in a linear format for the company which otherwise leads to less working capital crisis which is not obviously good to the company.

So this type of low contingency of working capital can be financed with the bank as working capital loan with high interest which should be avoided to the highest level and other financial source I would suggest for low working capital company is to take credit through commercial papers but this would be given for high requirement of working capital cases.

3.Cash conversion cycle and how to decrease it:

The cycle which mentions the availability of the cash in inventory, receivables and the time(cycle) they take to get converted into cash form its initial point to add revenue to the company. The main objective of this cycle is to find money within the company without getting debt from outside of the company which fortunately increases the costs of all the activities of cash flow.

In order to decrease it, the company has to decrease the holding period of the inventory by taking proper measures to do so or reduce the production process to the optimal level as use the good produced effectively or without so properly financing the working capital properly

1st cycle: selling cycle - marketing and sales upto the point of sale

2nd cycle : inventory holding cycle

3rd cycle : delivery of the product to the customers

4th cycle: collecting payment

These are the four dissect phases of the CCC and these should be properly managed in order to optimize the working capital.