Impacts of Working Capital

It is critical for a financial manager or organization to have good fiscal management policies and procedures in order to mitigate or help stabilize any unexpected events that might result in an economic loss or burden to the organization. Additionally, financial managers should be aware and comprehend that existing assets and liabilities affect how the public reacts to the company's stock and how successfully the organization performs. This chapter, which we are currently working on, introduces the idea of extra funds required (AFN) to assist us better comprehend working capital management (Brigham, et al., 2016)

Cash Conversion Cycle

The cash conversion cycle and the cash budget are the subjects I have chosen for this week's discussion. The CCC is calculated using the method Days of Inventory Outstanding +Days Sales Outstanding – Days Payables Outstanding. We can estimate the rate at which a business may transform its investments into returns using this formula. As a result, a lower CCC rating is more advantageous. Constantly, the CCC has an impact on organizational choices. From my perspective, it has impacted the business's ability to grow or invest in new technology. My company, for example, acquires alcohol stock on a weekly basis. The sooner we can sell the shares and earn money, the better. We may then select whether to reinvest the revenue produced in the company or to apply it to retained profits.

The cash conversion cycle is a statistic used to assess a business's management effectiveness and efficiency. Additionally, it is used to assess the company's overall health. The formula determines how quickly a business can turn cash on hand into accounts payable and inventory, then into accounts receivable and sales, and eventually back into cash. A business may have a negative or positive cash conversion cycle, and it is the manager's responsibility to guarantee that the organization's assets and cash flow are positive by calculating the measure themselves (Investopedia, n.d.)

Example of Cash Conversion Cycle – Colgate Case Study

From 2008 to 2015 financial reports, we see that the cash collection cycle has reduced from about 46 days in 2008 to 38 days in 2015. This indicates that Colgate is increasing its cash conversion cycle on a year-over-year basis. This indicates that the receivables collection time has reduced generally, resulting in a shorter cash conversion cycle. Additionally, we see an increase in the average payment days, which has resulted in an increase in the cash conversion cycle. However, Colgate's cash conversion cycle has deteriorated in recent years as a result of the rise in inventory processing days.

Cash Budget

The second aspect of the cash budget is just as critical to corporate decision-making. A cash budget is defined as "a table that summarizes cash inflows, expenditures, and balances over a certain time period" (Brigham & Houston, 2019). The cash budget has many components, including a sales estimate, anticipated fixed expenses, and predicted variable costs. A company may calculate how much cash it anticipates having at the conclusion of the budgeting period based on these predictions. The cash budget is critical to the organization's decision-making process. Using my own expertise in event planning, I developed a cash budget to indicate where and how much I wanted to spend. Additionally, organizations use cash budgets to decide when they will get funds. Due to the fact that certain customers may pay late, an organization may get insight into its liquidity and determine if it has enough cash to function or whether more funds are needed.

A cash budget is a forecast or plan for anticipated cash collections and expenditures for a certain period of operation. These cash inflows and outflows consist of revenue received, costs, and loan payments. In other terms, a cash budget is a forecast of a business's future cash flow (Miles, et al., 1980). This enables the financial management to make informed decisions about the appropriate allocation of resources and information data in order to evaluate the organization's strengths and weaknesses and calculate the implications of failing to correct them.

Example:

Bisa Chili Pepper began with a cash budget of $500,000. From the acquisition of all capital equipment necessary for operations through the first supply of our goods to wholesalers, it was critical for our finance manager to ensure that all receipts for inventory delivery to customers on (IOU) were properly recorded (Lambert, et al., 2007). A business called Blow Chem placed a $10,000.00 purchase order, but our courier and warehouse manager failed to register it. At the conclusion of the month, the business discovered that our original inventory count exceeded the month's sales, which was subsequently revealed to us by Blow Chem through a cheque sent to our buying department for the missing inventory cash conversion. Our budget proposal for the comprised the inventory deficit, which had an impact on our projected budget for the quarter and the year as a whole.