NATIONAL INSTITUTE OF TRANSPORT

(NIT)

DEPARTMENT OF BUSINESS AND ENTREPRENEURSHIP STUDIES

TITLE : INDIVIDUAL ASSIGNMENT

MODULE NAME : TRANSPORT FINANCE

MODULE CODE : BAU 07210

PREPARED BY : MARCO, Victor

REG. NO : NIT/BATF/2015/92

LECTURER NAME : RYOBA, Chacha

SUBMISSION DATE : 2nd November 2016

QUESTION

a) With examples describe working capital management

 Working capital management is administration of current asset and current Liabilities of the
business concern so as to ensure the most financially efficient operation of the company,
therefore it is an act of planning, organizing and controlling the components of working capital
like cash, bank balance inventory, receivables, payables, overdraft and short-term loans.
The main two objectives of working capital management are, first to increase the
pro tability of a company since pro tability is related to the goal of shareholder wealth
maximization, so investment in current assets should be made only if an acceptable return is
obtained and second is to ensure that it has sufficient liquidity to meet short-term obligations as
they fall due and so continue in business. The component of working capital maybe described as
follows;
CASH MANAGEMENT
Cash is the money which a business concern can give out immediately without any
restriction, therefore cash management is concerned with optimizing the amount of cash
available, maximizing the interest earned by spare funds not required immediately and reducing
losses caused by delays in the transmission of funds.
However holding cash to meet short-term needs incurs an opportunity cost equal to the
return which could have been earned if the cash had been invested or put to productive use. On
the other hand, reducing this opportunity cost by operating with small cash balances will increase
the risk of being unable to meet debts as they fall due, so an optimum cash balance should be
found.
The following are cash management method
 Speedy Cash Collections; the business must prepares systematic plan and refined
techniques that aim at speedy cash collections from customers, and customers should be
encouraged to pay as quickly as possible without delay, also there should be an early
conversion of payments into cash
 Slowing disbursement; under this technique the firm is supposed to pay its payable only
on the last day of the payment because when a firm avoids early payment of cash, it may
be able to retain the cash with it and that can be used for other function.
INVENTORY MANAGEMENT
Inventory is stock of goods or a list of goods, in manufacturing point of view it includes,
raw material, work in process and stores. Therefore a proper planning of purchasing of raw
material, handling, storing and recording is to be considered as a part of inventory management.
Simply inventory management act by which a business considers what to purchase, how to
purchase, how much to purchase, from where to purchase, where to store and when to use for
production.
The main technique used in Inventory management is effective control and administration
of inventories which is a system that ensures supply of required quantity and quality of
inventories at the required time and at the same time it prevent unnecessary investment in
inventories.

THE MANAGEMENT OF RECEIVABLES

The term receivable is defined as debt owed to the concern by customers arising from sale
of goods or services in the ordinary course of business, it arises only due to credit sales to
customers, hence Management of account receivable is defined as the process of making
decision resulting to the investment of funds in these assets which will result in maximizing the
overall return on the investment of the firm.
The objective of receivable management is to promote sales and profit until that point is
reached where the return on investment in further funding receivables is less than the cost of
funds raised to finance that additional credit.

Therefore the company’s trade receivables management policy formulated should also take
into account the its current and desired cash position, as well as its ability to satisfy expected
demand and Identify the appropriate credit policy, for instance credit terms which will attract
customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue and hence return on capital.
MANAGEMENT OF SHORT TERM INVESTMENT

Short-term investments are temporary stores of funds, they include, repurchase agreements,
commercial paper, and money market mutual funds. The management of this investment is done
by taking into consideration liquidity, maturity, credit risk, yield, and requirement of collateral of
those investments.

Therefore identification of appropriate source of financing should be done, for example

given the cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank loan or overdraft, or to convert debtors
to cash through factoring.

IMPORTANCES OF WORKING CAPITAL MANAGEMENT

Working capital management due to the following reason

Working capital management corporate profitability by providing empirical evidence on

the effects of working capital management on the profitability of a business demonstrating on
how managers can improve profitability by shortening the cash conversion cycle through
inventory reduction and reduction in the outstanding number of day’s receivables.

Working capital management is directly responsible for the avoidance of bankruptcy.

Unsuccessful working capital management can lead directly to bankruptcy by preventing a
business from paying off liabilities or by preventing the generation of new capital with which to
pay future debts.

Working capital management as an accounting strategy focus on the maintenance of a

sufficient balance between a company’s current assets and liabilities. An effective working
capital management system allows businesses to not only cover their financial obligations, but it
is also a way to help companies boost their earnings.
 To put it briefly no business can run effectively without a sufficient quantity and
management of working capital. It is crucial to retain right level of working capital. Finance
manager is required to decide the amount of accurate working capital. A business enterprise with
proper working capital management is always in a position to avail advantages of any favorable
opportunity either to buy raw materials or to implement a special order or to wait for enhanced
market status.

Inventory control is also a significant constituent in working capital management. The deficiency
of inventory may cause work stoppage. On the other hand, surplus inventory may result in
blocking of money in stocks.

The overall success of the company depends upon its working capital management, for that
reason effective working capital management lies at the heart of a successful company, playing a
crucial role in the increase of shareholder wealth and the achievement of bene ts from capital
investment. In fact, poor management of working capital is one of the more common reasons for
corporate failure. It is essential that company managers have an understanding of this key area of
corporate nance.
BIBLIOGRAPHY

Paramasivan,C. Suramanian, P, Financial Management, New Age International (P) Limited,

Publishers (2008)

Gitman, L.J. (2008) Principles of Managerial Finance, 12th edition, Boston: Pearson Education

Horne, J.C., & Wachowicz J.M. (2000). Fundamentals of Financial Management. New York, NY:
Prentice Hall Publishers

www.studyfinance.com

www.investopedia.com/terms/w/workingcapitalmanagement