Working Capital Management Decision Definition
Here we study Working Capital Management
Decision Definition.
WCM helps the company in utilizing its
funds from short-term sources and long-term sources because when there is need
of financing Working
Capital, WCM plays an important role in this regard. The flow and running
of the business depends entirely on the efficient use of short-term funds. Every
business needs money to meet the daily expenses. The role of WCM is to utilize
the current resources of the business in such a way that the current
obligations and current operational expenses are met. It helps a company in
influencing the decisions of the investors. It can be considered as lifeblood
for the running the business. If the company is not managing the working
capital effectively then the business suffers due to unavailability of cash to
meet daily expenses. It prevents the stoppage of business activities because
the liquidity position of the business is strong enough to meet operating
expenses, like wages, repairing of machinery, etc.
In WCM, those decisions which consist of
one year are considered. Also, these decisions are taken on the basis of
liquidity and profitability.
Under working capital management, the
management uses different techniques and policies to manage the working
capital. These policies are concerned with the managing of assets having life
within one year, like Cash and Cash equivalent, Inventories and Account
Receivable, and short-term financing in such a way that liquidity and
profitability are favorable and acceptable for the company.
In WCM, there are Four Decisions Criteria
Ø Cash Management
In this decision, the company maintains
enough cash balance to meet daily operating expenses and tries to reduce the
cash holding costs.
Ø Inventory
Management
The company identifies such level of
inventory at which there is no interruption of production and no lost sales due
to unavailability of inventory. The company also tries to reduce cost of
holding inventory.
Ø Account Receivable Management
The company identifies appropriate
credit schemes so that account receivable is increased and ultimately sales are
also increased and finally the risks of bad debts and collection expenses are
reduced.
Ø Short-term
Financing
The company must follow appropriate sources
of finance. For inventory, credit is given only when the credit is granted by
the supplier. When the company is making sales on credit basis, then the
company must ensure that efficient and effective credit system should be
utilized.
At
last we can try our level best to make your concept clear about "Working Capital
Management Decision Definition".
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