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Importance of Working Capital Management

Explain why working capital management has become increasingly important in the current business environment. Provide at least two examples of organizations that have good working capital management policies, and two examples of organizations with poor working capital management policies. Be sure to explain why the policies of your selected organizations are effective and ineffective.

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In a competitive business world, successful organizations understand the importance of critical-thinking in the decision-making process. To make sound business decisions, organizations must combine strategic planning with comprehensive data analysis, which includes the evaluation of financial and non-financial records and processes. Management and those involved with maintaining the company's financial health use a variety of tools, methodologies, and performance metrics to gain a better understanding of the company's current financial state, create reliable forecasts, and formulate and implement solutions for the company.

Organizational leaders realize that to make the most optimal decision, the company has to fully evaluate all aspects of the company's operations including policies and procedures. The working capital policy is imperative to a company's success because the policy serves as a strategy on how the organization can maximize its resources. "The working capital policy is the firm's policy about its working capital level and how its working capital should be financed... decisions about how much to keep in its cash account, what level of inventory to maintain, and how much to allow receivables to build up" (Danh, 1999). The working capital policy also includes handling creditors, debtors, inventory, and possible sources of additional working capital. The working capital policy will assist companies in making sound business decisions on how it shall finance its existing assets. Good working capital management is important. According to the Treasury of New Zealand's (2007) website, if a company is "operating with more working capital than is necessary, this over-investment represents an unnecessary cost." The website further added that excess working capital means "operating inefficiencies." Even with excess assets, it is considered inefficient because the assets can be used, invested, and generate additional income for the company.

The following are just some of the various components of a working capital:
Current Assets
? Liquid Assets (cash and bank deposits)
? Inventory
? Debtors and Receivables
Current Liabilities
? Bank Overdraft
? Creditors and Payables
? Other Short Term Liabilities

Provide at least two examples of organizations that have good working capital management policies, and two examples of organizations with poor working capital management policies. Be sure to explain why the policies of your selected organizations are effective and ineffective.

Some of the companies that have been successful at managing their working capital are Ford Motor, Dell, Kitty Hawk, General Motors, Texas Instruments, Prometheus Print, etc. On the other hand, companies that have been unsusccessful at managing their working capital are Larry's Market of Seattle and Dephi.

Successful

Texas Instruments - Factoring of Receivables (Factoring)
Invoice factoring, also known as factoring or accounts receivable factoring, is a financial option available to organizations. By factoring, businesses are able to liquidate outstanding receivables to financial institutions, referred to as factors, for immediate cash funding. Business organizations that factor out their receivables sell their outstanding receivables to factors. The organizations are able to have quick access to cash; however, the cash received for the receivables sold is less than the face value of the total receivables sold. In turn, the factors (financial institutions) perform the collection for these outstanding invoices and potentially receive the full amount when the ...

Solution Summary

This solution goes over the increasing importance of working capital management, providing examples of ideal and poor policy.

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