Working Capital and Capital Employed
Corporate Finance and
Investment
1. Define “Working Capital”
Working Capital=Current Assets-Current Liabilities =Accounts Receivable + Inventory - Accounts Payable
“Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business.”
2. Give concrete measures how w.c. can be optimized (receivable, inventories (JIT, etc.)
Due to the formulas as followed in Question 1, “accounts receivable, inventory and accounts payable” are the three components. So in my opinion, these three aspects should be considered if we would like to optimize the working capital. In addition, current liabilities management is a significant part. 1) Reduce Inventories * “In order to keep inventories at lower levels, top-performing companies establish advanced and demand-driven logistics concepts with their suppliers, such as vendor-managed inventory, just in time (JIT) or just in sequence (JIS), and collaborate with their suppliers in terms of a holistic supply chain management with mutual benefits.” Because when we storage the inventory, there must be some additional cost, like the fee of the new warehouse and the fee of the power, and “JIT” theory describes this, “increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.” * Lean manufacturing. Customers do not pay for mistakes or waste but value. Also, I think, it is a way of variance management. * Improve forecast accuracy and know demand of customer so that companies could work out more reliable planning process. * Reduce work-in-progress inventory, which mean redesign of production processes. Improve the conditions of productions and cut the time and the cycle of producing as much as possible. 2) Speed Up Receivables Collection * All
Investment
1. Define “Working Capital”
Working Capital=Current Assets-Current Liabilities =Accounts Receivable + Inventory - Accounts Payable
“Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business.”
2. Give concrete measures how w.c. can be optimized (receivable, inventories (JIT, etc.)
Due to the formulas as followed in Question 1, “accounts receivable, inventory and accounts payable” are the three components. So in my opinion, these three aspects should be considered if we would like to optimize the working capital. In addition, current liabilities management is a significant part. 1) Reduce Inventories * “In order to keep inventories at lower levels, top-performing companies establish advanced and demand-driven logistics concepts with their suppliers, such as vendor-managed inventory, just in time (JIT) or just in sequence (JIS), and collaborate with their suppliers in terms of a holistic supply chain management with mutual benefits.” Because when we storage the inventory, there must be some additional cost, like the fee of the new warehouse and the fee of the power, and “JIT” theory describes this, “increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.” * Lean manufacturing. Customers do not pay for mistakes or waste but value. Also, I think, it is a way of variance management. * Improve forecast accuracy and know demand of customer so that companies could work out more reliable planning process. * Reduce work-in-progress inventory, which mean redesign of production processes. Improve the conditions of productions and cut the time and the cycle of producing as much as possible. 2) Speed Up Receivables Collection * All