Finance Essay Example | Topics and Well Written Essays - 1000 words - 11

Finance - Essay Example A business could not open and operate without working capital finance. Another purpose of working capital is addressing seasonal or cyclical financing needs. Here, working capital finance supports the build-up of short-term assets needed to generate revenue, but which come before the receipt of cash. Adequate and appropriate working capital financing ensures that a firm has sufficient cash flow to pay its bills as it awaits the full collection of revenue. When working capital is not sufficiently or appropriately financed, a firm can run out of cash and face bankruptcy. Working capital is also needed to sustain a firm’s growth. As a business grows, it needs larger investments in inventory, accounts receivable, personnel, and other items to realize increased sales. Lastly, working capital is used to undertake activities to improve business operations and remain competitive, such as product development, ongoing product and process improvements, and cultivating new markets. The components of working capital usually comprise all the components of Current Assets (Petroff, June 1, 2001). However, that is not always so in the nature of the working capital cycle. Some modifications to working capital may involve the exclusion of some components of current assets. The diagram below illustrates a simple working capital cycle of an organization. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing money to the organization). The main sources of cash are Payables (your creditors) and Equity and Loans. Each component of working capital (namely inventory, receivables and payables) has two dimensions: (1) Time and (2) Money. When it comes to managing working capital, time is as valuable as money. If an organization can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g.