The working capital of an organization changes on a continuous basis and should be carefully monitored by finance managers to determine the correct course of action to take. “The financial executive probably devotes more time to working capital management than to any other activity.” (Block & Hirt, 2005, p. 145) The goal of financial executives in managing working capital is to keep costs to a minimum. This goal is accomplished through understanding the nature of asset growth, the process of matching sales and production, and financial aspects of working capital management.
Nature of Asset Growth
While most companies would like for all of their current assets to be self-liquidating and have zero debt, the very nature of business is to grow and obtain assets. For example, John starts a home t-shirt business printing t-shirts from home and sells them at the local beach to tourists. Each day he sells all his t-shirts leaving him with no inventory and a handful of cash. John takes his cash and invests a percentage in more supplies for t-shirt production and a percentage is invested in an interest bearing account. Over time John makes enough money to invest in a t-shirt company which provides t-shirts to retailers nationwide. As his business has grown John has acquired fixed assets on top of current assets. “Fixed assets grow slowly as productive capacity is increased and old equipment is replaced, but current assets fluctuate in the short run, depending on the level of production versus the level of sales.” (Block & Hirt, 2005, p.146)
Level Production vs. Matching Sales and Production
The level of production is vital to understanding how production flow is going to take place and what kind of financing would be needed. “Some firms employ level production me ...