Short-Term Working Capital Strategies

Cash crunch may affect liquidity and return on assets, which would affect the overall processes of the organization. To eliminate the crunch over short-term working capital, a short term loan could be taken from financial institutes. The cash flow could also be improved through cutting unnecessary capital expenditure during production process. Inventory supervision is another important aspect of working capital management, so CFO could use supply chain management to reduce the cost of production (Hill Jones, 2011). Reduction of cost of production is effective to face the credit crunch because it reduces the cash flow requirements of the company. It may face cash crunch situation through collecting outstanding payment or debt quickly to increase revenue and cash. The offering of discounts and allowances over collections would be effective to increase the short-term working capital and to maintain cash position.  

 

To reduce the impact of cash crunch, first strategy that will be used by the business is to increase the collection from debtors by offering discounts and allowances then to reduce the cost of production then to obtain loan from financial institutions. The working capital strategies will be implemented in this order as it will reduce the cost of capital and would improve the overall efficiency of the business (Sagner, 2010). This order for working capital strategies would also be effective to reduce the overall cost of the production and to eliminate the impact of cash crunch.

 

Working Capital Management

The working capital management relates to the management of current assets. Company’s working capital consists of its investments in current assets such as cash and bank balance, inventories, receivables and marketable securities. Inventory management is the most important aspect of working capital management in a company. It is an important component of current assets because it includes the highest amount of cash investment of the company. A better control over this element in working capital management helps the firms to reduce the organizational cost and to improve organizational significance by improving long-term performance of the firm (Müller, 2011). Inventory is an essential factor in manufacturing company because too much stock can place heavy burden on the cash resources of business as most of the working capital will be invested in that part. So, it is the part over which company has most control.

 

 A company has least control over capital expenditure and prepaid expenses in working capital management. It does not control its monthly expenses effectively because capital expenditures are based on planning and capital budgeting. Company reduces costs and increase revenue of operations through controlling its expenses (King, 2011). Control of capital expenses is expensive and takes long-time for company because it requires several affords by human recourse or management that increases cost of the organization. So, companies have least control over the cost of expenditures in working capital.

 

Cash Flow Planning

Cash flow planning is a process to forecast short and long-term business expenses against the projected cash inflows. Cash revenue and cash disbursement is the important part of cash flow planning because liquidity is calculated on the base of them. Cash revenue represents the expected revenues for each months and cash disbursement means total required monthly expenditures (Jiang, Issa Malek, 2011). The estimation of all expenses and revenue sources is the major element of cash flow planning as it determines accurate forecasting of cash flows.  

 

Company must determine the requirement of future investment such as purchase of building and machinery accurately. It is because future investment may require high amount of cash, which may create financial obligations over the company and may affect the estimation of cash flows (Madura, 2008). So, the future investment requirement is required to be estimated accurately for a proper cash flow planning.

 

Healthy cash balance at the end of each month is good for the company. It represents that the cash balance is available to perform the next month’s operations. Cash surplus at the end of months is beneficial for company because it provides commercial edge for company in all transactions (Good, 2003). It also determines that company is managing its inventory and debtors more effectively and required less working capital due to healthy cash balance at the end of each month. It helps the company to extend more competitive credits terms than competitors and take good position in the market.

 

Financial Strategic Plan

Company income or expenditure and its financial performance are mainly needed to begin with the financial portion of a strategic plan. The estimation of sales, sales growth, expenditures are needed to begin with a financial plan (Sottini, 2009). It helps to understand the future aspect of business. This information could be obtained through the sales department, manufacturing department, marketing department and HR department as these are the major departments that consume and provide expenses and income in a firm respectively. These departments are responsible to provide inputs for making financial plans.

 

Income and expenditure of company is important for analyzing the market position and growth of the company. Strategic decisions of company are based on growth of the company. Financial results are important in estimating success or failure of a business. It also helps to forecast future business performance including the sales, costs and earnings (Huang, 2009). These inputs could be used in the financial planning by estimating growth in sales and revenue and expenditures due to new business or strategic plan.