Fin 615 - Working Capital

Working Capital

FIN615-1204B-03

Colorado Technical University Online

December 2, 2012

Susan Weiss

Introduction

One of the most important steps any organization should consider in regards to their financial well-being is capital budgeting. By utilizing a capital budgeting technique they will be able to determine their financial position before embarking on any investment opportunity. This budgeting technique could be extremely helpful to Superior Living Inc. as it would reduce the chances of misappropriating funds if a capital project fails. With that being said, I will now turn my focus to the discussion of working capital, how to handle short-time debt, current ratios and how to make positive budgeting decisions (CTU, 2012).

Influence of working capital

In order to explain how working capital can affect organizational finances it would be pertinent to first explain what they are. In laymen's terms working capital equals current assets minus current liabilities (Ross, Westerfield, & Jordan, 2013). In view of the fact that working capital represents the organizations liquid assets or the means to which an organization possesses to cover unforeseen expenses and meet their short-term obligations it is necessary to ensure that a constant monitoring of the company's finances through the use of a balance sheet be carried out in an attempt to avoid shortages. For instance, when looking at a potential competitor such as Ethan Allen Inc. who recorded their 2012 assets as $644,788 with $322,920 in liabilities you can see after performing some simple calculations they had a net working capital of $321,868 which gave them a surplus margin of protection in which they can use for short-term projects (ETH, 2012).

With that being said, if the organization in question lacks sufficient working capital they would undoubtedly have an extremely hard time keeping their business operations up and running. For example, if the organization needed resources to produce their goods but lacked the working capital they would not be able to acquire the goods necessary to manufacture their product which means no sales. When a business fails to produce sales they usually don't stay in business all that long and usually end up in the middle of a full-fledged bankruptcy.

Handling short-term debt

One of the best ways to handle short-term debt is to have a business plan embracing three important components: a financial plan which covers the business's disposable income, a list of assets and liabilities and a strategic document outlining company objectives and goals (Ross, Westerfield, & Jordan, 2013). Company assets might involve physical capital such as computers and desks and all cash on hand. Liabilities might involve fixed and future expenses such as purchasing inventory,