Business Finance

Assignment no :3
Section
(MC-2)

Submitted by:
 Iqra Awan (L4F18MCOM0095)
 Bushra Sami (L4F18MCOM0041)
 Nuzhat Asif (L4F18MCOM0087)
Submitted to:

Prof. Abid Noor

Date:

25-06-2019
Working capital management ?

Working capital management involves the relationship between a firm's short-

term assets and its short-term liabilities. The goal of working capital management
is to ensure that a firm is able to continue its operations and that it has sufficient
ability to satisfy both maturing short-term debt and upcoming operational
expenses. The management of working capital involves managing inventories,
accounts receivable and payable, and cash.

Types of working capital management

1. Current Asset Management

The ageing analysis of your current assets including stock, debtors etc is of large
importance, since it is directly linked to the liquidity position of the company. You
have more space to business and more chances of profitability, when you are
successful in reducing your money in hands of your associates.

We have a strong analytical team which is trained in credit management. The

debtor- creditor position will be analyzed periodically and insights on the ideal
Current ratio position will be given to the management. We will intimate your
team, when the optimum credit ratio is crossed or when the stock in hand position
goes below the margin.

Current asset management includes management of cash, cash equivalents,

accounts receivable and prepaid expenses. Directus can help you to maintain a
good current asset position by effective debtors and creditors’ management.
Directus current assets management program focuses mainly on accelerating of the
payments due to the company through continuous follow ups and thereby reduces
the time of debt realization considerably.

2. Current liability management

The basic rule when funding assets is to match their term with the term of the
corresponding liability. That means that the short-term assets (that is the current
assets) are funded by short-term (or current) liabilities and long-term (or capital)
assets are funded by long-term liabilities.
So in that case it makes sense that working capital (the total of current assets) will
be funded by current liabilities.In this context there are really only two current
liabilities that can be used for funding the current assets; short-term bank
borrowing such as an overdraft and accounts payable which represents the credit
extended to a business by its suppliers of materials and other basic
inputs.Obviously, the cash flow that the business generates to settle these liabilities
comes from either its cash sales or the collection of its accounts receivable from its
customers. For the majority of larger businesses cash flow comes from accounts
receivable collections.But what happens if the accounts receivable are not collected
from customers in time to pay the operating expenses and the accounts payable
when they fall due? Well, that’s often when bankers get to meet the business
owner/manager/director for a serious discussion about cash flow.When we think
about a bank overdraft as a means of funding current assets we tend to assume that
the inventory (stock) figure is funded by accounts payable (trade creditors) so the
bank overdraft is intended to partially fund the accounts receivable (trade debtors)
figure.

From that it’s clear that a relatively easy way to fund additional working capital or
to reduce reliance on expensive overdraft funding would be to increase the funding
from trade creditors, which means negotiating longer credit terms from the
suppliersIt’s important that the business doesn’t just take longer to pay without
first getting the supplier’approval – the maxim is to use, don’t abuse, suppliers’
credit.

But there are two potential problems in getting longer credit terms from suppliers
which may make it an unattractive option;

1. Suppliers may increase the price of their product to offset the reduction in their
own cash flow.

2. Suppliers may refuse to supply more product until they have been paid for
previous deliveries.

What Is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the
behavior and actions of third-party debt collectors who are attempting to collect
debts on behalf of another person or entity. The law, amended in 2010, restricts the
means and methods by which collectors can contact debtors, as well as the time of
day and number of times contact can be made. If the FDCPA is violated, a suit
may be brought within one year against the debt collection company and the
individual debt collector for damages and attorney fees.

Significance of this act in working capital management?

Regulatory acts like the Fair Debt Collection Practices Act are important for
protecting the rights of consumers in the context of debt repayment. The amount
owed by a consumer can often contain errors, and debt collectors sometimes
pursue debtors with excessive and harassing tactics.

Although debt collectors are known to be aggressive with their collection tactics,
acts like the FDCPA give consumers more rights and assurance that they will be
treated with respect and have the opportunity to contest the amount of debt they
owe.