Working capital management Essay Example | Topics and Well Written Essays - 1750 words

Working capital management - Essay Example Implementation of an effective working capital management system will certainly assist a company to improve its earnings. Ratio analysis and management of separate elements of working capital are two major aspects of working capital management. Organisations normally give great emphasis on working capital management, because ineffective use of working capital may end up in net losses. Since the management of working capital is crucial for companies irrespective of their size and nature, well structured corporate governance strategies are inevitable for properly dealing with the working capital spending. This paper will discuss the significance of working capital management and various approaches to the management of inventory, receivables, cash, and payables. 1. Management of working capital As discussed above, nowadays firms give specific focus on working capital management because thoughtless short term financing has already caused several corporate failures. As Bokadiya (2011) poi nts out, there are two concepts associated with the management of working capital: gross concept and net concept. The gross concept indicates current assets and this model is known as quantitative aspect of working capital.... stimation is a difficult task for firms in accordance with its nature and size; hence, different firms follow different methods to estimate working capital. Generally, conventional method, operating cycle method, cash cost technique, and balance sheet method are the major approaches adopted for the estimation of working capital. Longenecker, Petty, Palich, and Moore (2009, p.576) describe that the working capital is primarily used to purchase raw materials for production purposes. Through the production process, the raw materials are converted into finished goods and which is then reconverted into cash by the sales process. This whole process is called working capital cycle (ibid). Effective management of working capital assists organisations to deploy current assets and current liabilities efficiently and thereby to maximise short term liquidity. A well structured system of working capital management entails short term decisions generally relating to the next financial period. The p rocess of working capital management mainly involves two steps; forecasting the amount of working capital and determining the sources of working capital. Through proper management of working capital, a firm aims to make optimum level of investment in various working capital assets. This process may also aid companies to assess the optimal mix of short term and long term capital. In addition, effective working capital management can be of great help to choose appropriate means of short term financing. Management of inventory, receivables, cash, and payables are different aspects of working capital management. Inventory management is of great importance in modern business transactions as this process plays a evident role in establishing balance between purchase and sales (Indian Institute of

Consequences of Lehman Brothers Bankruptcy Research Paper

Consequences of Lehman Brothers Bankruptcy - Research Paper Example (Mian et al, 2008). Another source of captive demand was the money market funds. This boosted their yields since they were required to hold only the high rated securities. The managers that funded these securities knew well what gamble they were playing with these funds but could not resist the temptations and benefit it came with them. The managers also hoped that if any shock arose from these funds, their immediate competitors would also face the same consequences which would result in a reduced reputational cost and this may result in the government interference and may end up supporting these companies through incentives and lowering of taxation. The problem was even strict and severe in the short bond funds. In contrast to the market funds, short bonds fund are not restricted to the types of gadgets they can own. Generally the regulation relies greatly on credit- rating agencies procedures of risks without understanding the incentive created on the regulatory game system. As sta ted, (Morris and Shin, 2002) in circumstances where there are numerous equilibrium, an increase in public information does not necessarily to enhance welfare since it can direct to unproductive bank runs. (Diamond and Dybvig 1983 ). Lack of transparency The other major problem that contributed to the downfall to bankruptcy of the Lehman Brother company was the lack of transparency in big markets. In the last ten years the market for acclaimed default swaps grew uncontrolled from almost zero to 44 trillion, which was more than the of the us stock market in twice the number. Generally the levels of these contracts were very low and did not exist... This paper aims to summarize economic repercussions of the Lehman Brothers bankruptcy, that essentially marked the beginning of the global financial crisis. Many companies around the world are affected by bankruptcy at a certain time in their financial year. When a company is declared bankrupt, it can no longer invest in the stock exchange. The government declares the company insolvent. An example of such company is the Lehman Brothers, a housing and real estate company that went into bankruptcy in 2008. Regulatory constraints brought about the inflation demand for products thus seeing Fannie Mae and Freddie Mac getting the approval of investing in these securities. Another source of captive demand was the money market funds. This boosted their yields since they were required to hold only the high rated securities. The managers that funded these securities knew well what gamble they were playing with these funds but could not resist the temptations. The managers also hoped that if any shock arose from these funds, their immediate competitors would also face the same consequences. The effect that accrues from a company being declared as bankrupt is huge. Businesses and companies should ensure that they adopt proper measures that will make them stay healthy and avoid being insolvent. They should do this by getting involved and seeking support from the government especially if the business is new in the market. The business should also encourage investors from foreign and local to invest in them.