Corporate Financial Management: Working Capital Policy
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Can you help discuss what considerations are needed for developing a working capital policy for a company that has low cash, or insufficient cash on hand during low weeks and is at risk of defaulting?
- Discuss what a working capital policy is and what should be done with accounts receivable
- Discuss how it will reduce future difficulties for working capital management
- Evaluate the risk associated with the recommendation
- Discuss contingencies for the recommendation
- Discuss performance measures that are used to evaluate your recommendation
- Create an implementation plan for recommendation
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Solution Summary
This solution explains working capital policy concepts. All questions are thoroughly answered in this solution.
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This is the principle we would want the working capital policy based upon:
All working capital policies are designed to provide sufficient cash. Working capital is essentially what is needed for day-to-day operations for the business. We want a working capital policy that provides management with enough cash + a small cushion but not too much cash, and of course we can't undercut cash and run out of working capital because then we would have to resort to short-term financing options, and this would cost the company additional money. If our working capital policy isn't structured right, it's going to provide too much cash and that would also cost the company money because that excess cash could be making money in an investment somewhere, which would have the money working for investors to increase their return on investment.
Let's specifically look at AR. I would recommend that companies set aside cash to cover low weeks and resort to short-term borrowing only to cover the difference. This would save the company the most amount of money in interest ...
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