Reference no: EM13974760

Question one: The first discussion is all about working capital. Working capital is the money needed to fund the normal, day to day operations of your business. It is an important aspect to companies and "many corporate financial officers identify working capital management as being very important to their firms' value" (Kieschnick, Laplante, & Moussawi, 2013). Therefore, companies need to be careful with how they evaluate and handle their working capital. The textbook makes the distinction between "gross working capital" which is "current assets used in operations, and "net working capital" which is "all current assets minus current liabilities" (Brigham & Ehrhardt, 2014). Essentially, working capital ensures you have enough cash to pay your debts and expenses as they become due. The working capital cycle is made up of four core components: Cash (funds available), Creditors (accounts payable), Inventory (stock on hand), and Debtors (accounts payable) (Brigham & Ehrhardt, 2014).

It is important for a company to determine the correct level of working capital they will need to run their operation. If the working capital is too high your business has surplus funds which are not being used properly to help the company earn a return. So, money is just sitting there that could be used to buy new equipment, fund marketing or advertising or for all sorts of purposes. If your working capital is too low it could indicate that your business is facing financial difficulties and you may run into major problems. If you do not have enough money to run the day to day operations of your business, it could cause you to cut corners or to even lose business. This could be dangerous to the success of your company. This could lead to running out of supplies needed to complete job, and paying too much for materials. If you don't have enough cash on hand, you may have to wait until the last minute to purchase needed supplies and pay a premium for something that could have cost less. Therefore, correctly accounting for how much working capital you need, will ensure you don't miss important financial opportunities (Brigham & Ehrhardt, 2014).

As you discuss working capital, present some examples to illustrate your points better. I look forward to reading your replies. ( 105 words)

Question two: Working capital can be defined as the current assets used in operations, and net working capital is defined as current assets minus all current liabilities (Brigham & Ehrhardt, 2014).There are three alternative policies regarding the size of the firm's operating current assets. Under a relaxed working capital policy, a firm would hold relatively large amounts of each type of current asset and hence a low total assets turnover ratio, this results in a low ROE, other things held constant. A restricted policy, results in low current assets and a high turnover, and hence a relatively high ROE. However, the restricted policy exposes the firm to risk, because shortages can lead to work stoppages, unhappy customers, and serious long-run problems. The moderate policy falls between the two extremes. A moderate approach to short-term financing involves matching, to the extent possible, the maturities of assets and liabilities, so that temporary current operating assets are financed with short-term debt and permanent current operating assets and fixed assets are financed with long-term debt or equity. The optimal strategy is the one that management believes will maximize the firm's long-run earnings and thus the stock's intrinsic value (Brigham & Ehrhardt, 2014). It is very important to manage working capital efficiently. This is important from the point of view of both liquidity and profitability. When there is a poor management of working capital, funds may be unnecessarily tied up in idle assets. This will reduce liquidity of the company and also the company will not be in a position to invest in productive assets like plant and machinery. It will affect profitability of the company. Every organization should budget an appropriate amount of working capital to meet its anticipated future needs. If this is not done properly, the organization will be unable to meet its liabilities as they fall due. This is a situation where the relevant organization is said to be technically insolvent. The amount of working capital required by an organization will depend on many factors like the type of business activity, credit policy of the organization, promotional activities, time period of the year and many others. In uncertain conditions, organizations must hold a minimal level of cash and inventories based of expected revenue. An additional safety buffer should also be added to this amount (Lasantha, 2014)

Your thoughts and comments? ( 150 words)