Evaluating Working Capital Your name

EvaluatingWorking Capital





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EvaluatingWorking Capital

Cashflow improvement

Thereare several ways that XYZ can adopt to help it improve its cash flow.For instance, it can speed up the speed at which it delivers itsgoods. This is because whenever a seller delivers his or her goods ina timely manner to his or her customers the faster such customers payfor the delivered gods hence, impacting cash flow in a positivemanner (Moore 2011, p.216). Fast deliver of goods and servicesrequire thorough examination of the whole process includingproduction of sales all the way to invoicing. XYZ should also haveadequate information on each the shipment status and delivery time ofits goods in order to put invoices into the hands of the buyers in atimely and proper manner. Adequate and reliable information, in turn,can play a key role in building a strong and long-term relationshipbetween the company and its customers while at the same timeimproving its cash flow. Undeniably, XYZ should ensure proper workingof all three flows of commerce-funds, information, and goods- inorder to quicken the movement of money through its supply chain. Itis of immense significance that a company manages its cash flow in awise manner better supply chain management ensures better cash flowmanagement (Palmer 2005, p.167).


Tradereceivables refer to the amount of money that is billed to customersby a firm or company whenever it delivers services or goods to them.XYZ can adopt various methods that can help improve its tradereceivables. First, it should ensure proper and timely distributionof monthly aging reports to the head of accounting, business owner,and sales manager for review. Accounts receivable turnover ratio canbe improved if XYZ set limits on the amount of credit sales it accept(Davenport 2008, p.642). For instance, it can set a percentage ordollar amount based on its current cash sales or alternatively it canoffer a lower price for item in order to encourage more cash sales.XYZ can also improve its trade receivables by setting up credit cardas well as online payment methods. Additionally, the company candecide to discontinue any sale of its goods to customers whoregularly pay late. However, before discontinuing this service, XYZshould calculate the interest that it pays on goods or materials itsells to such customers. It should then subtract the interest fromits profits in order to decide whether it is worth keeping suchcustomers. Likewise, the company can improve trade receivables byoffering incentives for early payment. To affect this, the companyshould come up with a separate note or place of notation o theinvoice that offers customers a discount if they pay by a particulardate (Musto 2004, p.739). Again, it should penalize customers who paylate in connection to this, XYZ should have a separate note on theinvoice that indicates the amount of fine that late customers shouldpay.

Improvingwork in progress

XYZcan improve work in progress by reducing lead times throughoptimizing use of materials, equipment, and people. According toMcKinsey (2009, p.428), changes in demand and available resources canbe attended to in a quick manner by carrying out rescheduling processwithin the shortest time possible. Increase on-time deliveries by 50to 90 percent also play a key role in improving customer satisfactionlevels (Smart 2007, p.452). The company can also shift its productionto a make-to-order model from make-to-stock one. Again, XYZ canimprove work in progress by ensuring effective control over itsresources in all production levels and over time. Similarly, if thecompany lowers inventory levels then, there is a high likelihood ofreducing work in progress by up to 50 percent (Moore 2011, p.224).Streamlining all manufacturing processes can also help XYZ improveits work in progress in an enormous manner. These processes mayinclude but not limited to raw materials intake and shipment of thefinal product. It should further add value to various aspects of itsvisibility, performance, consistency, agility, and execution in itsoperations. The company should further adopt ad embrace the use ofmodern process control solutions that can help it reduce manual work,shorten timelines, and improve efficiency. Quality control adlaboratory informatics can also help the company to improve its workin progress by improving its planning capabilities as well asimplementing a well organized structure. A well organized structurehelp a company manage any data produced during quality control andtesting. Integration of lab equipment help in ensuring effectivetraceability, minimizing any risk that may come along with manualerrors, as well as improve efficiency of most ongoing operations.Again, faster distribution of information is achieved, elimination ofpaper-based process is effected, and the process of decision makingis accomplished within a short time whenever there is integrationwith management and production systems (Bhattacharya 2009, p.278).Similarly, XYZ can adopt various solutions of performance managementthat can help it carry out visualization, monitoring, and analyzingprocesses within a short duration of time.


XYZcan improve its trade payables by always entering a payable into itsaccounting system as soon as it receives the invoice. Afterwards, itshould ensure proper computation or calculation of the due date andplan to pay its close to the last day. It is also advisable that acompany make use of its credit card to pay some payables, likecourier services, utilities, and phone, whenever they are due.Likewise, the company should make use of its credit card instead ofits check in buying supplies, materials, and any other items, whichdo not go beyond trade credit, from vendors. Again, it is of immensesignificance that XYZ be organized whenever it handles its accountpayables if it is managing to get maximum leverages (Cornel 2012,p.191)

Inventoryof raw materials

XYZshould devise ways that can help it reduce top heavy inventories withan aim of freeing up some cash for investment in activities thatboost revenue growth. This can be accomplished by improving supplychain management that help in improving time to market, free up morecash, improve profitability, as well as reduce inventory (Brailsford&amp Yeoh 2004, p.232). One way that XYZ can improve its supplychain could be through establishing computer-to-computer links withcustomers and suppliers. As a result, the company can easily find outwhen customers run out of a particular good hence, restocking it inan automatic manner.


XYZcan improve its finished goods by creating on time release conditionsfor such goods that should be distributed to distributors andcustomers. Therefore, XYZ ought to improve its management informationsystems of its finished goods on time release.


BalanceSheet-January 31, 2014



Cash $ 20,000

Accountsreceivable $ 15,000

Inventory $150,000

TotalCurrent Assets $185,000


Plantand equipment $ 50,000

Businesspremises $ 650,000

Vehicles $70,000

TotalNon-Current Assets $ 770,000



Accountspayable $ 25,000

Bankoverdraft $ 10,000

Creditcard debt $ 5,000

Taxliability $30,000

TotalCurrent Liabilities $70,000


Longterm business loan 1 $450,000

Longterm business loan 2 $50,000

TotalNon-Current Liabilities $ 500,000


NETASSETS $ 385,000


Therefore,Workingcapital=current assets-current liabilities……$185,000 – $70,000=$115,000


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