Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business

CHAPTER 11 FINANCIAL MANAGEMENT OF WORKING CAPITAL

In the previous chapter, we discussed working capital and its importance, and we defined working capital management. We would reiterate here that the immediate goal for the financial management of working capital is to efficiently handling its two components, current assets and current liabilities, in a way to maximize the value of assets and minimize the firm's liabilities. The ultimate goal would be to maximize profit, minimize risk, and achieve the highest possible value for the entire firm. In this part of the discussion, we will detail the management of the current assets first, and then move to the management of current liabilities.

Current Assets Management

Here, we will discuss the management of cash, marketable securities, account receivable, and inventory.

11.1 Cash Management

Cash includes both the ready currency and the bank demand deposits. It represents the ultimate form of liquidity to which all other assets might be reduced to, sooner or later. Needless to say that cash is the most liquid asset, there is an aspect that makes it the most efficient in honoring the financial obligations, paying the bills, and handling emergencies. Cash is like the blood of the operating business in general, but it is especially essential in the life of a small business. There are four cash balances that would justify the importance of cash utilization.

1. Transaction balances include the cash balances of all routine operating payments ...