Management will use a federation of policies and techniques for the management of working capital. These policies aim at managing the current assets usually cash and cash equivalents, inventories and debtors and the short term financing, such that cash flows and returns are acceptable.
Inventory management: Identify the level of inventory which allows for continuous production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just in Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).
Debtors management: Identify the appropriate credit policy, i.e. credit terms which will pull towards you customers, such that any impact on cash flows and the cash change cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is preferably financed by credit granted by the supplier; however, it may be necessary to make use of a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
Inventory management: Identify the level of inventory which allows for continuous production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just in Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).
Debtors management: Identify the appropriate credit policy, i.e. credit terms which will pull towards you customers, such that any impact on cash flows and the cash change cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is preferably financed by credit granted by the supplier; however, it may be necessary to make use of a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
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