Effect of Working Capital Management Policy for the Efficiency of Emprisa Inno Solutions Inc.'s Operation

CHAPTER 1 – THE PROBLEM AND ITS BACKGROUND

Introduction

Working capital management is defined as the management of current assets and current liabilities, and financing these current assets. Management of working capital is one of the keys to an overall corporate strategy. It will help create shareholder value that will increase the stability of a business.

Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations active. When not managed carefully, businesses can grow themselves out of cash by needing more working capital to fulfill expansion plans than they can generate in their current state. This usually occurs when a company has used cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses. As a result, working capital shortages cause many businesses to fail even though they may actually turn a profit. The most efficient companies invest wisely to avoid these situations. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations.

There are three working capital management policies that are adopted by different companies namely: aggressive, conservative and moderate policy.

With an aggressive working capital policy, organization holds a minimal level of inventory. Therefore, aggressive policy would minimize costs. But the organization may not be able to respond rapidly to increases in demand because of the low stocks. Companies adopting an aggressive working capital financing policy, finance part of its permanent asset base with short term debt. Because cost of short term debt is generally less than the cost of long term debt, aggressive working capital policy provides the highest return but it is still very risky. A large inventory is maintained under the conservative policy and therefore the return is lower than under an...