Importance Of Working Capital Management Accounting Essay


Financial management is related with the money matters. It is all about the managing money. Managing money is very important part of an individuals life or for a business organization. Personal financial management will help a man budgeting the income of his own or family. The person will be achieve the goal of his life similarly, managing money is same important for business organization. In our report we are going to discuss about the managing fund for a consultancy firm. I am recruited as the consultant of the firm. In this report I tried to show the capability of the firm and the initial funding for running the firm. In later topic there are some importance given on the working capital management. The important of the information and technology is discussed. There are relation between the company learning and competitive advantage. These are also discussed in this report.

Working capital management is the most important part for a business organization. It has a direct impact on the liquidity and profitability of the company. The firm can't survive in the long run if it can't run its business profitably in short run. There are no fixed rules for determining the limit of the working capital it depends on the size and the industry in which the company works. Profit maximization is the main purpose of every organization. It helps company to achieve the objectives.

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Working capital is the current assets of the firm which is in the form of financial resources of the business that can be changed in the form of resources during another day of execution. Current assets include of cash, inventories, prepaid expense, short-term investments, notes receivables, accounts receivables, etc. the net working capital can be measured by subtracting the current liabilities from the current assets. If there is a positive value it shows the existence of the working capital in the organization. If it shows a negative value there is deficit of working capital in the firm. When the business determines the level of working capital or it manages the short-term fund it calls the working capital management. The management is the synchronization between the current liabilities and the current assets. It emphasize on the proper balance of the both ends. Profitability of the firm is also called by the rate of return on investment. If there is any unjustified investment in current assets it will impact on the firm very badly. The basic thing of the working capital management is managing the working capital in a way that will balance the financial resources of the firm. The balance will be between the risk factors and the profitability of the investments. Being the vital part of the business working capital is must for the survival for the company. It is required for the continuous operation of the business. The firm needs working capital for maintaining the solvency profitability and decreasing the liquidity crisis of the company. So the importance of the working capital can't be defined in few words. The business needs the required the desired for the running operation. If firm invests on the working capital the fund will fall in a liquidity crisis. And the profits from the long term assets will be diminished. The firm has to maintain higher cost for storing the inventories. As an example the world's largest superstore Wal-Mart has 4640.17% lower than the service sector but 460.84% higher than any department stores industry. The working capital is 1699.3% higher than any industry.

If a firm invests its funds heavily in the fixed assets to generate the profits then it may happen it may face the bankruptcy for the insufficient fund. So the minimum level of liquidity must require for the company. The managing working capital consists of two steps. These are planning and controlling them. The planning and controlling facilitates the firm in meeting the short-term fund management and save from the wastage of the resources by investing the current assets. If the management is effective working capital decreases the needs of the long term debt. Management can follow different approaches for their working capital. There are two different policies these are aggressive policy and conservative policy. Aggressive policy is associated with the higher investment in fixed assets and lower investment in short term asset. Conservative is opposite to the aggressive policy. In this policy management invest low in fixed assets.

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If we watch the working capital management of Wal-Mart we will see they have taken different strategy for managing their working capital. The company rotates the entire inventory almost in every month. The purpose of this rotating is to reduce the overhead costs of the management.

Wal-Mart maintains 30$ billion accounts payables. The accounts receivables are about $4. This company is able to maintain the balance because of its brand image. Wal-Mart also invests in some short-term notes for using the fund which is excess.

Benefits of information and knowledge:

It is recognized that the developed countries have been changed. Knowledge can be defined as the information when it has some characteristics. There are many scholars in different sector. The knowledge will be combined in experience, context, explanation, and the reflection of the opinion. The firms or the other institution value it so much. There is no greater intention paid to the subject knowledge. The need of the use of in business organization is very essential. It has an abstract value for the organization. The emergence of the knowledge based economy has enhanced the necessity of the knowledge and information. So there may be few knowledge for a particular knowledge but the learning of the knowledge has the broken the area. If one wants to understand the benefits of the knowledge he must know first what the knowledge management is. It means the capability of managing the knowledge and information in the organization. Knowledge is the individual but shared in a group for the better use of it. The management analyzes the information and uses it for its business purpose. There is difference between the data and information. Data that are collected is not information in all cases; it can be just random numbers or the ideas. Taking the data analyzes it and uses it for the decision-making then it can be called information. The information that allows the people to understand the information give an idea is called knowledge. For an example, a company knows it has sold 30 units of product in a month. The management takes the data then the company takes the other month's data and analyzes the data comparing it to other sales. So the management can take the decision comparing the data analyzing it.

Benefits of knowledge can be seen immediately. If the company can handle the information in a better way and understanding it can use the knowledge the knowledge for the company. The ability makes enable the company search data and fetch it so quickly. The company can have the ideas about the information by using the data. The advantages can be seen very quickly. The employees of the company can handle the data with an improved efficiency because of the good sharing attitude and practice. The benefits of the sharing knowledge are the results of the good handling information. And it affects the goal of the company.

The information and knowledge affects the banking sector and the payment system. The technology invention has made obsolete the current banking payment system.

ICT in environmental scanning and benchmarking:

Environmental scanning is associated with the data assessment of the current company. The data can be external or internal in nature. The assessment of the data is to forecast the future performance of the company. Internal scanning is related with the evaluation with the internal company's current performance. The effectiveness of the operation runs by the company and the quality of the personnel or the success of the whole activities. External scanning of the environment is associated with the customer response and the stakeholder of the company. The environment scanning system is the precautionary system of the organization by using the information and technology. ICT helps to innovation and in environment scanning.


The ICT is used for the benchmarking. It gives the base of the developing a competence based model framework for the comparing practice of the firm. The data shown in the empirical research give the rise of the benchmarking. The competency between the companies gives the capability to approach for the IT performance of the firms. It enables to develop the rigorous benchmarking among the organizations. The benchmarking process is determined on the output of the firm. The data stored in the file of the company can give the company competitive advantage.

Relationship between organizational learning and competitive advantage:

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Knowledge has been very important for the companies when the technology has been evolving. Learning an organization is a part of knowledge. Companies allow the employees to pick up new knowledge for the betterment of the company so sharing the knowledge and spreading it to the inside employees make an innovative environment. It generates a sustainable innovative environment. It gives the company competitive advantage. Innovative thinking is necessary for the company for making something new. It differentiates the company from the other competitors. If the process is done perfectly an intelligently it enables the company to make different decision among the competitors. So knowledge is a valuable asset for any company. No other assets will give any company that long term competitive advantage. Knowledge is very difficult to duplicate. Context specific knowledge and implicit knowledge is very difficult to imitate. So the other companies can't purchase the knowledge so easily. And the sustainable advantage is knowledge-based advantage for the knowing of it. When a particular organization knows something which is complementally organized the existing knowledge can be combined with the new knowledge to develop some elite visions. So the knowledge sometimes gives more than other things can do.

For an example the technology giant company Sony Inc. has success and failures from 1950 to 2000s. Sony's first success was from 1950s to 1960s it had gained success in transistor radio and TV. They combined some new technologies and improved their market. The core competence of Sony is knowledge sharing, knowledge management system and tuning. The other strategy is 'waterfall' strategy it gives Sony most advantage to be competitive in the new market. The nature of this knowledge sharing culture contributed to rapid revenue growth.


Finance for a business corporation is very important. The management of the fund is the key factor for the success of the business. The business has to identify the source of the finance before starting a business. The working capital management for a firm is also important. The firm should manage the capital so that the firm can use the idle money and the firm doesn't have fall in liquidity crisis. Information and knowledge gives a firm a long term benefits. The knowledge sharing and improvement of IT gives the company competitive advantage. ICT gives the company a benchmark so that the company can judge themselves on the scale of it. After all there is strong relationship between the organizational learning and the competitive advantage. The company can get the success by performing the job perfectly.