Working capital management is the finance the firm use to sustain daily operations. Without sufficient working capital, the firm would attach its assets to illiquid assets and/ or investments. As a result, liquidity required for the business to pay its trade obligations in both external and internal entities would not be possible. As a result, stoppage of operations will be likely and thinking of long-term growth is impossible. Deferring wage bills can be a measure to mitigate problems in working capital. However, this is not strategic as people who supposedly receive the money will not be motivated to work. When productivity is reduced, processing of inputs to outputs will be slower and this may as well contribute to reduction of working capital.
Factoring are more secure than wage bills deferment because it is attached to future receivables of the company and it is not inclined on the emotive side of the workforce. On the contrary, factoring is more expensive than wage bills because the former requires payment on periodic basis while the latter is one-time. Factoring such as promissory notes also entails binding obligations where in the issuer have the right to collect or else litigation or asset-pulling would result. However, wage bills deferring makes the firm monopoly of labor that employees have no bargaining power to complain or instantly go to litigation especially when groups are not organized.
Forward exchange contracts to an importer are useful because it minimizes the risks of trade in the international market. It will mitigate the importer risks on currency fluctuations and changes in interest rates. His trade implications at the future date are predictable that will guide him towards security.
Credit:ivythesis.typepad.com
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