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Working Capital Policy and Cash Budgeting

Discuss the role of working capital policy and cash budgeting on regards to the optimization of working capital within the firm. Explain the role of cash budgeting and the development of projections for cash inflows and outflows. Provide examples where possible.

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Working capital policy is the set of rules and/or standards that companies create and adhere to to assure that short term obligations are met. Working capital is basically current assets-current liabilities. If the firm's current assets are less than the current liabilities, this can signal a situation where the firm may not be able to cover its short term expenses. This is an important consideration for employees who rely on the company's cash meeting payroll, for vendors who sell the firm inventory and/or supplies, and for investors who expect a return in their investment. As the name implies, working capital policy has the greatest single impact upon working capital.

Cash budgeting is a process firms use to estimate future cash needs for a given term (maybe a month or a quarter). This is an important consideration and is an integral part of working capital policy (as cash is a current asset and figures in to the working capital equation). A firm who budgets too little cash and subsequently ...

Solution Summary

The solution descirbes working capital policy, cash budgeting, and cash inflow/outflow projections.