February 14, 2017

How do firms choose their operating cycle? How do firms choose their cash conversion cycle? What is the impact of firm’s operating cycle on the size and periodicity of investments in receivables and inventories? How do seasonal and cyclical trends affect firm’s operating cycle, cash conversion cycle and investments in current assets? These strategic policy questions relate to optimal cash flows synchronization and effective working capital management designed to maximize the wealth producing capacity of the enterprise.

In this review, we will examine some pertinent and extant academic literature on effective working capital management and provide some operational guidance to small business enterprises. The shorter the cash conversion cycle, the smaller the size of the firm’s investment in inventories and receivables and consequently the less the firm’s financing needs. Although setting ending cash balances is, to a large extent, judgmental, some analytical rules can be applied to assist effective formulation of better judgments and optimize cash flow management.

As you know, a correlate to cash is net working capital. Net working capital is not cash but the difference between current assets (what a firm currently owns) and current liabilities (what a firm currently owes). Current assets and current liabilities are firm’s immediate sources and uses of cash, respectively. Clearly, a firm’s ability to meet its current financial obligations (bills due within a year) depends on its ability to manage its current assets and liabilities, efficiently and effectively.

Effective working capital management requires the formulation of optimal working capital policy and the periodic management of cash flows, inventories, account receivables, accruals and account payables. And because poor working capital management can severely damage a firm’s credit worthiness and limit its access to money and capital markets, every effort must be made to minimize business default risk.

The significance of liquidity cannot be overemphasized. In addition, anything that adversely impacts a firm’s financial flexibility degrades its ability to borrow and cope with unexpected financial hardship. A firm must preserve its ability to react to unexpected expenses and investment opportunities. Financial flexibility derives from a firm’s use of leverage as well as cash holdings.

In practice, optimal working capital management includes effective cash conversion cycle, effective operating cycle, the determination of appropriate level of accruals, inventories, and account payables and the attendant funding options. Working capital policy impacts a firm’s balance sheet, financial ratios (current and quick assets) and possibly credit rating. Critical to efficient firm’s working capital management is a good understanding of its cash conversion cycle, or how long it takes for a firm to convert cash invested in operations into cash received.

The cash conversion cycle captures the time passed from the beginning of the production process to collection of cash from the sale of the finished products. Typically, a firm purchases raw materials and creates products. These products go into inventory and then are sold on account. Once the products are sold often on credit then the firm waits to receive payment, at which point the process begins again. …

Take responsibility for YOUR financial health.  All aspects of it: expenses, income, savings, retirement, investing, pocket change, the works.

This is a simple idea with potentially profound implications. Yes, it may be a bit cliché, but that doesn’t mean that it isn’t true. Everyone would like to improve their life in some way – financially, mentally, physically, emotionally, or a huge variety of others – but nobody can until they accept that, fundamentally, they are responsible for what will happen.

The first step to take is to do just that: assume full responsibility for your financial health. Regardless of your situation, you can’t dwell on the past. It doesn’t matter if you got hit by a disaster, laid off, if a business deal went south, or if you think weren’t positioned right from the start. As long as you focus on the problems you perceive, you will be unable to move forward in your financial life.

Forgive everyone for all the bad things they have done to you. Let go of what has happened to you before. Stop thinking about the negatives and the past events that have placed you into whatever your current situation is.. Right now – don’t put this off, saying “Oh, that’s a good thought, I’ll consider it.” And there should be no half measures, even if you share finances. Assume 100% of the responsibility for your physical and financial health or you won’t be able to improve your situation. Above all else you must hold yourself personally responsible.

This is now going to let you take power over your financial health. If you want to change your situation for the better, you must have that power, plain and simple. Assuming full responsibility means you have no excuses when you fall off the wagon, no exemptions for slips, moments of weakness, and no one to pass the blame to when you aren’t as responsible as you want to be.

Without 100% responsibility you are utterly powerless. You’ll find ways to blame the world, your significant other, the economy, or something else. If you want things to change, you have to step into your power fully and completely. And you can’t do that if you remain in denial of even a smidgen of your responsibility. Now, I don’t mean that you need to blame yourself every time you slip even the slightest bit or something goes wrong. Not all circumstances are within your control. But you do always have the ability to respond to changes in your situation, so remember that!

Accepting responsibility for your own finances gives you the power to change your financial health for the better. It must be your own force of will that does so, but knowing that it’s on you makes all the difference in the world. Use your creativity and abilities to make the best of it!…