It should be noted that working capital is usually the nerve center as well as the life-blood any business entity. Working capital can also be said to the investment that is made in the assets that are short-term. Current assets on the other hand can be defined as those assets, which can easily be turned into cash within the accounting year. In other terms, it is defined as the total current assets minus the current liabilities of the entity (Akinsulire, 2008).
Working capital management refers to a strategy of management accounting, which focuses on the maintenance of enough levels of working capital, current assets, as well as current liabilities. Working capital management is significant since it makes firms to have enough cash flow so that they may be able to meet their short-term obligations as well as their operating expenses. The implementation of effective system for working capital management is indeed a sure way of improving the earnings of any organization. There are two major elements of working capital management. These include ratio analysis as well as proper management of each of the components that forms the working capital. Any system for working capital management should take into consideration some major performance ratios. These major ratios include inventory turnover, working capital ratio, as well as collection ratio. It should be noted that proper analysis of ratios enables the management of organizations to explore some of the key areas of focus for any business entity like management of cash, inventory management, accounts receivable as well as proper management of accounts, which are to be paid.
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Effective and efficient management of working capital is very vital for the achievement of profitability as well as liquidity by companies. When there is very poor as well as ineffective management of the working capital, funds may be tied up in assets, which are idle, and this is capable of reducing the profitability as well as liquidity of the company (Reddy & Kameswari, 2004).
For there to be effective and efficient liquidity management, there is need for proper planning, proper control of current liabilities as well as current assets in a manner, which is capable of shunning the numerous risks associated with the inability of firms to meet their obligations in the short term. It is also capable of helping organizations to avoid too much investment in short-term assets. The management of working capital is capable of vitally affecting a firmââ‚¬â„¢s health (Sagan, 1955). There are a number of things that that have significant influence on the efficiency of working capital management. These include factors like the size of the company, practices within the industry, future growth of the sales, and compensation of the executives.
Lamberson et al. (1995) illustrated that proper management of working capital is an issue of concern in a number of organizations presently. A number of financial managers have found it hard to determine the significant working capital drivers as well as the most favorable working capital level. Therefore, firms are capable of minimizing risks. Besides, firms are capable of improving their general performance after thorough understanding of the role of working capital as well as some of the things that determines the working capital.
When each of the elements of working capital is kept at the required optimal balance, working capital management objectives shall have been accomplished. The success of any business venture depends heavily on the capacity of the individuals who are charged with the responsibility of managing finances to ensure that receivables, inventory as well as payables are effectively managed (Filbeck and Krueger, 2005). It should be noted that firms are capable of decreasing their financial costs and also increasing the funds which are available for the purposes of expansion through proper minimization of investment amounts which are held in current assets. Working capital optimal level is the balance between efficiency and risks. Measurement of working capital management is p popularly done by cash conversion cycle. This involves adding the number of days of the outstanding sales and the days of inventory sales and subtracting the number of days of outstanding payables (Keown, 2003). A longer time lag implies that investment in working capital is larger. When the cash conversion is longer, profitability may be increased since it will lead to greater sales being made. It should however be noted that corporate profitability is also capable of decreasing as cash conversion cycle decreases. It is very important to note that efficient and effective management of working capital is very important in the creation of shareholder value.
Drawbacks of having too much working capital
Always on Time
Marked to Standard
There are a number of dangers that are associated when working capital is in excess. First, it makes organizations to have too much inventories. This may make the inventories to be mishandled, wasted, stolen and the probability of loses occurring are very high.
Too much working capital is also a clear indication that the credit policy of the firm is very defective. Bad debts may be on the increase and this may affect profits negatively.
Management may also be made to be complacent and this may bring about inefficiencies in management.
Drawbacks when the working capital is insufficient
There are a number of challenges that are faced by firms when their working capital is insufficient. For instance, operations of such firms are always hindered and besides, the growths of such firms are always stunted because of inadequate funds. Financing extra stock will therefore be very hard for the business. In addition, the firm will not be able to finance its daily operations. This will disrupt the business and will hence influence its profits negatively. Businesses ought to have enough funds capable of ensuring that the operations of the business are financed. When an organization operates with limited working capital, its growth will be stagnated, it will lose credit opportunities and besides, the firm will lose its good will.
Knowledge management has in the recent past been a major concern for a number of organizations, majorly for the organizations whose business processes are already redesigned. It has also been a major concern for the firms which have integrated the approach of total quality into their operations and practices.
Knowledge generally refers to the knowledge of individuals as well as the knowledge which is shared by groups. On the other hand, knowledge management refers to is how that information is arrived at, shared and analyzed.
Over the past, knowledge has always been seen as a major asset for businesses and besides, in the 1990s, knowledge management acted as a great differentiator between companies. There is need for thorough understanding of the flow of information within the organization. This is key for the implementing knowledge management. It should be noted that knowledge management does not only deal with the management or organization of journals or books, looking for customers over the internet, or organizing for material circulation. On the contrary, all these activities to some extent are parts of the processes and spectrum of knowledge management.
There are a number of benefits that organizations can gain from the adoption of knowlefge management. First, knowledge management makes it very easy to measure progress. Besides, it is capable of reducing the cost of expert attrition. Additionally, knowledge management enables organizations to effectively manage huge amounts of information which is capable of making workers to serve their customers faster and in better ways.
Knowledge management enables businesses to continue their operations. It is also able organizations to protect their intellectual capital. Besides, it enables organizations to lay much emphasis on the human capital which is one of the highly important assets that are owned by organizations.
There are several other benefits that organizations stand a chance of benefiting ater the adoption of knowledge management.
It can be defined as all those ways through which firms develop, enhance besides managing knowledge as well as standards in the functions of the organization and also in the culture of the organization. It enables organizations to not only adjust but also to enhance their efficiency through proper application of broad array of skills of the workers. Organizational learning is a vital thing for present day organizations. The benefits that are brought by organizational learning to organizations have well been understood by several strategists. It should be noted that in the a number of firms always strives to gain competitive edges of their competitors. Organization learning is indeed a sure way through which organizations are capable of becoming competitive (Movizzo, 1995; Drucker, 1995).
Organizational learning enables organizations to enhance their capacity to provide solutions to a number of business situations. It hence enables organizations to improve on their competitiveness and performance through the generation of fresh knowledge (Harari, 1994).
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A learning firm is capable of creating frameworks as well as plans capable of expanding organizational learning. When an organization does this, it will lay much emphasis on the major elements of the process of learning in order to leverage employeesââ‚¬â„¢ intellect. Organization need to understand that via organizational learning, they will be able to invent fresh knowledge essential which is capable of making the organization to gain competitive edges (Harari, 1994).
Ict in environmental scanning and Benchmarking
Organizations that are enduring usually anticipate and also adapts to changes in the environment in such ways that are capable of providing fresh growth and profitability opportunities. This survival drive which is continuous is referred to as environmental scanning. It entails information gathering, analysis, and assimilation. The information in a number of cases relates to the external environment of the firm and it enables the firm to detect budding trends as well as budding conditions which can in the end affect a given industry. Information of such kind is applied in supporting strategic planning in marketing, production, as well as several other strategic initiatives. A thorough environmental scan enables managers to easily detect changes in the environment as well as some problems before generating crisis to organizations. Information and communication technology can be used in the process of environmental scanning.
ICT in Benchmarking
Benchmarking refers to a nonstop process which is applied so as to measurer the performance of an organizational against other relevant comparators. It should be noted that benchmarking is It is an activity that is ongoing and it is mainly aimed at improving organizational performance. When it is merged with the ââ‚¬Å“Best Practicesââ‚¬Â, it is capable of becoming a very powerful tool which may make identified gaps to be addressed.
Best Practices on the other hand refers to the processes, methods, as well as systems which are capable of dramatically enhancing the performance of an organization in a number of the measurement areas.