· How would you define working capital? What could happen if an organization neglected to manage its working capital? What working capital techniques would you recommend for your organization? Why?
Working capital is a firm's current investment in assets or assets expected to be turned into cash in less than one year. This definition is not as familiar as the term net working capital that refers to the difference between a firm's current assets and current liabilities. The text states that many people state use the term working capital even though they are referring to net working capital, which is the case for my organization. If an organization was to neglect its working capital, then the organization could find itself with greater current liabilities than it is able to repay. Additionally, the interest rate for short-term liabilities can fluctuate making it difficult to plan or manage effectively.
The working capital techniques that I would recommend to my organization are the hedging principle and TVM. The hedging principle follows that short-term liability requiring financing should come due at the same time the assets purchased with that financing produce cash flow for the organization. The TVM follows that when there is excess capital the organization should invest those funds to strengthen their position for times when financing may be needed. The investments should be in securities that can be made available as needed. The use of these techniques can help the organization grow funds and eliminate unnecessary short-term liabilities. The use of these methods requires the organization to be pro-active in their monitoring practices.