Determining the optimal amount of working capital is a vital component for both the current and the new project. Determining the gross and net working capital is necessary for the development of a successful policy for the management of the company's operations.
Instructions
Step 1
The need for working capital is calculated, as a rule, depending on their place and role in production. For example, in the West, it is customary to pay more attention to the management of accounts receivable and determining the needs for free cash. In Russia, traditionally, more emphasis is placed on managing the money needed to invest in inventories.
Step 2
Effective management of stocks of raw materials, auxiliary and basic materials is necessary for the continuous provision of production with a certain type of material resource. Determination of working capital and, as a consequence, stocks, often becomes a political task in the context of a single enterprise. In this process, the interests of production workers, planning services, and sales departments collide. The latter, together with marketing services, advocate an increase in inventory at all stages of production, so as not to disrupt the supply of incoming orders and to provide quality customer service. The same point of view is shared by production workers, for whom a high volume of stocks provides flexibility when demand increases, and reduces the risk of disruptions and downtime. Planning and financial services, on the other hand, oppose the accumulation of large quantities of stocks. They strive to reduce this volume to the minimum level in order to increase the turnover of current assets and reduce storage costs.
Step 3
To resolve conflicts of interest in defining working capital, management must clearly understand the pros and cons of each viewpoint. Among the disadvantages of increasing inventories are the following: increased storage costs, the need for additional storage space, tying up too much working capital in inventories, an increased risk of deterioration of inventories and the amount of illiquid inventories. An insufficient level of inventory can be fraught with the following problems: losses and reduced productivity due to equipment downtime, disruption of the rhythm of production, disruption of the production program, loss of real and potential clientele, lost profit due to under-production of finished products.
Step 4
The problem of determining the working capital can be determined by the stronger influence of any structure in the enterprise. However, it would be preferable to resolve the issue at the highest level in order to determine the most optimal option for the company. It is necessary to find a compromise between liquidity and turnover, between risks and costs. An increasing number of enterprises in determining the optimal value of working capital are inclined to the point of view "less is better", replacing it with the "stock does not fix trouble" scheme.
