Finance and Strategy Essay Example | Topics and Well Written Essays - 3000 words - 1

Finance and Strategy - Essay Example Working capital management is a keystone that determines the short term solvency position of the company. It shows the ability of the firm to meet its short term obligations with its short term resources. Usually it is required to pay off the suppliers, purchase raw materials, wages and other direct expenses related to the core business operations. It ensures the business perpetuity and sustainability (Matz, 2011). It is the difference between short term assets/ current assets and short term liabilities/ current liabilities. Working capital means net current assets i.e. when the current assets exceed current liabilities. A company is expected to have sufficient working capital to meet its current obligations; else it signifies a weak short term solvency position. Working capital includes the following items (Spurga, 2004): It is the time taken to convert the short term assets into cash to meet its short term liabilities. A longer cycle time means that a company takes long time to convert its current assets. For example, company X has a supplier payment period of 30 days and collection period of 60 days. Its working capital cycle is 30 days, resulting in a deficit of 30 days that needs to be financed through short term loans. Companies should aim to reduce its working capital cycle in order to reduce its cost of short term borrowing that impacts the income statement and balance sheet (Periasamy, 2009). The cash conversion cycle measures the cash to cash cycle. Business’ use cash to buy inventory, and produces goods which are sold in the market to earn cash. The measure of the time taken for employment of cash to earn cash is the cash conversion cycle. A longer cycle is significant of longer collection periods, which implies a slow cash conversion cycle. It is calculated by adding the days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding. Each of the mentioned metrics has got