Propose a working capital management strategy for accounts
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Your manufacturing company is facing a cash crunch, and the chief financial officer (CFO) is having difficulties allocating the cash to pay various company bills.
For each of the following net working capital accounts, propose a working capital-management strategy that will likely free up enough cash to keep the company stable:
Accounts receivable
Inventory
Accounts payable
Then, for each strategy, describe at least 1 pro and 1 con of implementing that strategy.
References included
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Solution Summary
The propose of working capital management strategy for accounts are examined. The pros and cons of implementing the strategy is examined.
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Accounts receivable
1. Factoring accounts receivable - with this strategy the company can sell its accounts receivable or assign it in exchange for a loan. When it sells its accounts receivable, it can either transfer the receivables to the financier or retain the responsibility of collection, at the option of the financier. When it assigns its receivables, the company will collect, but from the proceeds, will have to pay the loan first.
a. Advantage
i. this strategy has lower credit checks and formalities
ii. no loan covenants and pre-payment penalties (Correia, Flynn, Uliana & Wormald, 2007, pp. 12-25-12-26).
b. Disadvantage
i. Facilities providing these type of financing may be very difficult to locate
ii. Interest costs related to this type of financing is relatively high
2. Offering discounts to customers for paying within a certain period
a. Advantage
i. Costs relatively nothing
ii. May even increase sales
iii. Improves the company's mix of accounts ...
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