Financial management
Introduction
For a company, achieving a sustainable improvement over the long-term requires cash management to become part of everyday life for everyone in a company. It only points out on the impact on every decision that a company may create. Everyone has their own roles and responsibilities for cash and working capital and the right policies must in place to be governed.
Effective Management on Working Capital
It is common for the firms or high performing companies to focus on cash and working capital management. The first reason for this kind of behavior is that the finance departments are constantly watchful on market complexity to avoid the inefficiency and poor processes. Also, the complexity was a primary trigger for action on working capital for the next years to come.
The second reason on why does the company focuses more on their working capital is to drive many companies to expand a wide range of emerging markets ( and , 2008). It can be domestically or internationally which still depends on the capacity of the business.
The need to focus in the working capital generated from investments are repatriated, made available for further investments or returned to stakeholders. But during the economic uncertainty, the focus on working capital requires consistent executive sponsorship and alignment of goals which puts greater weight on the company’s ability ( and , 2008). And still the cash and working capital are set to remain high on the corporate agenda.
Managing the Elements of Working Capital
For economists or business, the working capital can be clearly explained through representation of an equation: Working Capital = Current Assets – Current Liabilities (, 2008). But in a view of students and other people that have a little knowledge on business aspects, explaining the importance of managing the working capital can be difficult.
There are three major elements of working capital which are the accounts receivable, inventory, and accounts payable, that can be all expressed in days and collectively expressed as the working capital cycle. Working capital cycle varies with industry and must remain fairly constant within the industry or business. To keep the working capital cycle constant and healthy, it should be done with managing collections aggressively, plan ahead to reduce inventory before the economic crisis or slowdown creates an impression and extend the payments to offset slower inventory turns (, 2008).
Cash management is important for survival and sometimes takes priority over profit. But an effective management starts by understanding and projecting about the cash that a business will receive and spent; and taking several steps to optimize and minimize the revenue and expenditure, respectively.
The Concept of Market Efficiency
A well functioning market is not clear but with a better understanding about the competitive markets – there is a buyer for every seller, and the expectations of people in the market place in pursuit of self-interest can be an indication of the market efficiency.
An efficient market can easily adjust in many developments and in which trading is available, although there is also an existence of the minor market inefficiencies ( and , 2000). Therefore, it is a challenge to focus on the performance on professional investments and their managers to establish strong form efficiency.
The Investment and Financing
The investment and financing activities of a firm depends on how will it help the performance of the firm. It can be in a form of finding securities, finding large operating assets or debt structure. For some reasons, the companies left the equity behind and have relatively plays a small role (, , and , 2006).
An investment and financing strategy is efficient when a firm needs to raise capital in order to finance its investment opportunities (, 2006). It should be it and stay as it is as an answer to the market efficiency. In a perfect market determinant, all the projects with positive net values should be funded. However, firms might face financing constraints that limits managers’ ability to finance potential projects and result to underinvestment.
And if the firm decide to appraise the capital, there is no guarantee that the correct investment are implemented (, 2006). Therefore, managers could choose to invest inefficiently by making wrong predictions, bad project selections, too much consumption or exploitation of the resources that result to a poor investment and financing activity.
Conclusion
In a comprehensive business world, firms create their own version of “silent war”, where they craft different strategies or techniques to emerge as a strong firm. But despite the many facts that give these firms so much promise, there is still one wrong decision that will turn their world up-side-down.
Investment or financial activities should be managed well. A business can endure any crisis and downfall when its key people or drivers prepared for a safety landing. Their goals and vision should not only focus on gaining the positive profit but surviving the economic challenges.
References:
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