What are some of the working capital decisionsSolutionSome o

What are some of the working capital decisions?

Solution

Some of the working capital decisions are
1.Inventory Management Decisions: The firm need to choose whether it follows First in first out, Last in First out method and weighted average cost ,method to calculate inventory,. It needs to calculate the optimum amount of inventory as excess inventory locks up cash and less inventory causes unfulfilled orders or opportunity loss. If inventory turnover is high then Cash will be generated. (Inventory turnover = Cost of Good S sold/ Average Inventory)

2. Account receivable management: High account receivable causes cash crunch in the firm. The account receivable days should be managed in such a way that the optimum. Cash flow to the firm is there. If the account receivable days decreases then the cash is realised faster however due to competition fixed credit days have to be given to customer otherwise there will be loss of business

3. Account Payable Management: By increasing account payable days the cash can be generated. By negotiating with creditors favourable account receivable days can be achieved which will inject extra cash to the company. Moreover, sometimes availing trade discounts can save lot of cash .


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