Working Capital and Budget Optimization

TOO LITTLE OR TOO MUCH WORKING CAPITAL 4

WorkingCapital and Budget Optimization

TooLittle or Too Much Working Capital

Workingcapital is perhaps one of the most fundamental elements of a businessentity. It defines whether a business entity would have the capacityto bill customers, as well as the amount that it can afford to investin other aspects without diluting its working capital. Having toomuch working capital could be indicative of declining sales or delaysin the payment of invoices by customers (Mathur,2003).This means that a high working capital means that the company runsthe risk of losses from obsolete or time-barred goods. In instanceswhere the high working capital has resulted from high accountsreceivable balance, the liquidity of a company would be at stake asit means that it would be incapable of quickly converting itsreceivables to money (Mathur,2003).In the case of too little working capital, it means that the companymay not be able to finance its payables as they are higher than themoney it has. In such a scenario, for instance, the company would beincapable of taking up new investments or continue operations.

KeyStrategies for Budget Optimization

Oneof the key points regarding TFC is the fact that 45% of the customerspay immediately, while another 45% take up the one-month deferralperiod. This affects the working capital in the hands of the companyas it means that a large proportion of the money is in the hands ofdebtors and for a long time (Mathur,2003).This creates the risk that the debts would be unpaid. It isimperative that the time is reduced or even the rule replaced bysubstituting it with discounts for cash payments. In addition, it isimperative that the amounts of dividends that go to investors arereviewed. This does not necessarily need to be as a result ofdecreased profits but could be as a result of enhanced investmentsthat drain the coffers of the company (Mathur,2003).

References

Mathur,S. B. (2003).&nbspWorkingcapital management and control: Principles and practice.New Delhi: New Age International.