One of your long-standing clients is a domestic manufacturer, who up until now has not only...

Question

One of your long-standing clients is a domestic manufacturer, who up until now has not only manufactured their products solely in the US but also only sold their products in the US. About a month ago, their CEO visited and said they were planning to “go global”; this would include both sourcing of manufactured parts from overseas, and selling their products all over the world. Back then, he asked you to prepare a report on how he should expect this new direction to change the existing challenges of cash flow and working capital management. Given Joan now being on board, you asked her to prepare a report to give him inQuestion and Answer format.

The questions to be answered are:

What are the components of working capital management; which are under the control of a firms management, and which does management have little if any control over?
Describe what the cash conversion cycle is all about and which parts of it change negatively when sourcing parts from overseas?
Which parts of it change negatively when selling products overseas?
What strategies a firm can use to mitigate the disadvantages described in 2 or 3 above?

David · Accepted Answer

Question: What are the components of working capital management; which are under 
the control of a firm’s management, and which does management have little if any control 
over? 
Answer:- 
Working capital management is a part of financial management. Working capital can be 
defined as excess of current assets over current liabilities. Working Capital helps in determining 
liquidity in the operation of the business of all entities. Working Capital Management deals with 
issues such as managing current assets, current liabilities and their inter relation. 
In working capital management current assets and current liabilities are placed in a 
proficient manner in order to maintain short term liquidity. Following are the Objective of 
working capital management:- 
- Most important aim is to manage the firm’s current asset and current liabilities in 
order to ensure that short term obligations can be easily meet. 
- Working Capital Management interacts with the current assets and liabilities and 
arrives at the optimum level of both. 
- Ensure that short term liquidity and profitability is maintained. 
- In order to determine most appropriate financing mix.  
The two major components of working capital management are current assets and current 
liabilities. In order manage working capital one must manage its current assets and current 
liabilities, current assets is mainly composed of cash, inventory and debtors and current liabilities 
is majorly composed of creditors. Among these two the only component under the control of 
management is current assets, management can control component of current assets according to 
itself but so far as creditors are concerned management has little or no control over it. 
The reason why management has control over the current assets and not current liabilities 
is that current assets are internal to the organizations whereas current liabilities are external to 
the organization. For instance let say company wants to reduce it working capital than it can be 
done by reducing cash balance and investing the cash in long term assets or investments or by 
maintaining less amount of inventory of finished goods and raw material. Whereas in case of 
current liabilities management has little or no control because receiving the cash for credit sales 
is in the hands of creditors,

One of your long-standing clients is a domestic manufacturer, who up until now has not only manufactured their products solely in the US but also only sold their products in the US. About a month ago,...

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