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Working Capital Strategies
Companies should develop working capital strategies in preparation for long-term opportunities. These strategies may include granting credit, credit policies, collection policies, and financing trade credit. “It is useful to think of the decision to grant credit in terms of carrying cost and opportunity costs.” (Ross, et. el., 2005, ch.28, p.10) A firm can either grant or refuse credit depending on which results with the best NPV. “A collection policy is a method of dealing with past-due accounts.” (Ross, et. el., 2005, ch.28, p.17) A company must ensure they have enough cash flow from receivables to pay their bills. “A firm will extend trade credit if it has a comparative advantage in doing so.” (Ross, et. el., 2005, ch.28, p.12) A company determines the level of each of these areas depending on the distinct situation.
There are different approaches when choosing the best strategy to use for a company. When deciding on the best strategy, a company should consider the individual situation, size of the company, and the type of industry. Broward Aviation Services and Roman Jewelers are both small privately owned companies however; they both took a different strategy approach. Roman Jewelers consulted a financial planner to obtain expertise in handling the working capital issues. The financial planner had them increase long-term debt to increase cash flow. Broward Aviation Services worked on the issues internally by factoring, taking advantage of tax benefits, improving credit policies, and adjusting accounts payable.
Purpose of Cash Budgeting
An important aspect of properly managing a business is cash budgeting. “The objective of managing short-term finance and short-term ...