Basically, there are two types of capital need which comprises the following:
Working Capital Management:
Is the management of all aspects of both current assets and current liabilities, so as to minimize the risk of insolvency while maximizing return on assets.
The primary objective of working capital management is to ensure that sufficient cash is available to:
It is critical to understand that Profit is not Cash. A company can be very profitable but it can collapse simply because it has insufficient cash/liquidity to pay its relevant bill (as stated above).
Always remember that any company liabilities are settled with cash and not by profit.
Importance in Optimizing Working Capital Management:
Poor working capital management can lead to:
Characteristics of over-capitalisation are excessive stocks, debtors, and cash, low return on investment with long term funds tied up in non-earning short term assets.
Over-trading leads to escalating debtors and creditors, and if unchecked, ultimately to cash starvation.
September 9th, 2006 Comments off
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