MANAGEMENT OF WORKING CAPITAL

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing such that cash flows and returns are acceptable.  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 uninterrupted production but reduces the investment in raw materials and minimizes re ordering cost and hence increases cash flow ;  Debtors Management :Identify the appropriate credit policy ie credit terms which will attract customers , such that any impact on cash flows and cash conversion cycle will be offset by increased receive and hence return on capital.  Short Financing: Identify the appropriate source of financing; given the cash conversion cycle, the inventory is ideally financed by credit granted by the supplier: however it may be necessary to utilize a bank loan, or to convert “debtors to cash”.  These items are also referred to as circulating capital.