Owners and managers in the business need to make working capital management decisions such as inventory management, cash-flow management, accounts receivables, and supplier or vendor trade credits to ensure the company has sufficient cash-flows to pay short-term obligations. There are a few different working capital strategies a business can employ. Flexible current asset management involves holding large cash balances and inventory. The restrictive current asset management strategy requires companies to keep current assets low. Finagle a Bagel is a young, growing business that applies the working capital trade-off strategy to manage their working capital (Parrino, Kidwell, & Bates, 2012). Married entrepreneurs purchased the business when it was a few years old and had four to five stores (University of Phoenix, 2014). The owners encountered many of the same issues commonly associated with running a young business. They had to learn to deal with customers, vendors, and suppliers; however, the larger issue was discovering how to manage their working capital.
Maintaining and continually producing working capital is imperative for any business. Effective working capital management ensures the company has enough money to pay the bills. Managing their current assets, inventory, and liabilities are all part of working capital management (Parrino, Kidwell, & Bates, 2012). Finagle a Bagel owners focused on mapping out their future and ensuring the business would grow enough to produce a successful cash flow. A successful cash flow, and keen understanding of their banking relationship, will allow the companies to more comfort when taking on debt or liabilities. The strategies Finagle a Bagel use for managing working capital are no different from the plan many companies utilize. The owners established a good rapport with their bank, vendors, and suppliers (University of Phoenix, 2014) which enables them to create the opportunity for positive interest rates and trade-offs.
The good interest rates assist in the short-term and long-term when they need to acquire a line of credit to pay suppliers or to expand the business. The working capital trade-off strategy requires the manager to balance shortage costs against carrying costs (Parrino, Kidwell, & Bates, 2012). The business must be flexible. To allow for more time to pay another business back, trade credit is a strategy businesses extend to one another. Businesses work out a type of credit line to provide the other business with a suitable amount of time to pay their bill (Parrino, Kidwell, & Bates, 2012).
Credit lines are ideal and prevent banks from getting involved. Finagle a Bagel uses the strategy of trade credit regularly. Improper working capital management may jeopardize a company to default or bankruptcy. Upon reviewing the working capital management video, it is inevitable that the owners and managers in a business should monitor cash inflows and outflows periodically by computing financial ratios such as efficiency ratios – inventory turnover, and account receivable turnover and working capital ratio to ensure that the company has adequate cash-flows all the time.
Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed). Hoboken, NJ: Wiley. University of Phoenix. (2014). Week 3 Electronic Reserve Videos. Retrieved from University of Phoenix, FIN/571 – Foundations of Finance course website.
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