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Friday, November 1, 2019
Financial Managment worksheet 1 Essay Example | Topics and Well Written Essays - 1250 words
Financial Managment worksheet 1 - Essay Example If a company can also cut down on the accounts receivable period and convert the accounts receivable into cash in a much faster time, the less cash it needs to maintain as it can meet its current obligations with the cash that comes from the collections. However, revising the credit policy will entail a cost, that is, the possible reduction in sales as customers are given shorter time to pay for their purchases. There has to be a balance then, as to what will be the new policy and the effect of it on sales. The cash conversion cycle is the sum of the inventory period, the accounts receivable period less the accounts payable period. Therefore, in order to improve working capital management, the company can do something with the inventory period, the accounts receivable period or sometimes with the accounts payable period. If a company cuts the production time and convert them into sales, the less cash the business needs in order to meet its obligations. Cash from operations is generated by selling inventories, then receiving cash, or receiving a promise to receive cash in the form of receivables. The cash generated from operation depends on how fast the firm converts inventory into cash, therefore using cash to pay for additional purchases in inventory, and help meet short-term obligations. By increasing the inventory turnover, the firm can have inventories converted into cash. However, there is also a cost to resorting to this option. This means that, in order for the firmââ¬â¢s inventory to be sold faster, it has to increase its efforts on marketing and promotion of its products, thus incurring additional expenses. By ensuring that sales come in faster, and inventories turned into cash are reinvested for additional purchases of inventory, the effort is on generating sales mostly with cash payment. In order to match short-term needs with short-term sources of financing, another option can be to borrow for short-term.
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