discuss the importance of working capital management to shareholders and creditors ?

Answer 1

The term working capital refers to the amount of capital which is readily available to a company. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organisational commitments for which cash will soon be required (Current Liabilities).

Current Assets are resources which are in cash or will soon be converted into cash in "the ordinary course of business".

Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business".

Thus:
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

In a company's balance sheet components of working capital are reported under the following headings:

Current Assets:
Liquid Assets (cash and bank deposits)
Inventory
Debtors and Receivables

Current Liabilities:
Bank Overdraft
Creditors and Payables
Other Short Term Liabilities

The Importance of Good Working Capital Management
From a company's point of view, excess working capital means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Approaches to Working Capital Management
The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximising the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.

Working capital management takes place on two levels:
* Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management
* The individual components of working capital can be effectively managed by using various techniques and strategies

When considering these techniques and strategies, companies need to recognise that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance.

Answer 2

This is a really good question

Answer 3

Well, it depends..