Working Capital Management and BI – Part II
Working Capital Cycle: The basic objective of financial management is to maximize shareholders wealth. This objective can be achieved when the company earns sufficient profits. The amount of profits largely depends on the magnitude of sales. But, sales do not convert into cash instantly. There is time lag between the sale of goods and the receipt of cash. Working capital is required to purchase the materials, pay wages and other expenses in order to sustain sales activity the time lag. The time gap between the sale of goods and realization of cash is called operating cycle. What operating cycle stands for?
a. Conversion of cash into raw materials
b. Conversion of raw materials to finished goods
c. Conversion of finished goods into receivables
d. Conversion of receivables into cash
The way working capital moves around the business is modelled by the working capital cycle. This shows the cash coming into the business, what happens to it while the business has it and then where it goes. A simple working capital cycle may look something like:-
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Working Capital performance cannot be optimized by inspection of individual component of working capital in isolation. You can’t do anything about the cost or stock problem if you don’t look at it from all business perspectives. All departments must be involved. 1KEY makes the difference, not by adding a new more sophisticated formula, but by offering an integrated holistic perspective. Replacing emotions with facts and calculating the impact of different business scenarios from a 360° perspective is the best decision support tool for those around the executive table.
This article was submitted by CA Navneet Mehta.
To read part I of this article click here.