Working Capital Management Essay

1493 words - 6 pages

Working Capital Analysis:
Working capital management is critical for business. Inappropriate working capital management will lead to major problems for the operations of the company. Management of the company has to make estimation about future expected sales, costs and so on in order to understand about the future working capital requirements (www.boundless.com). This provide guidelines to the management in raising appropriate funds at appropriate time, this will avoid interruption in the business operations. A company seeking for growth should be make critical analysis about the working capital requirements (finance4smallbusiness.blogspot.in, 2006). For this company, there are three different growth phases which has different decision to be implemented in an orderly manner. In this case, an appropriate analysis of each phase is required for better understanding about the working capital requirement.

Phase 1 - Acquire New Customer:
This decision is being chosen as there is more opportunity to include Atlantic Wellness who is a large player in the health food as the new targeted customer. By acquiring this customer the company encounters various changes which are discussed below.

Increase in sales: Acquiring new customers expands the business base and is expected to generate higher revenue for the company. The sales are expected to increase by $4,000,000 each year for three years constantly. Increase in the revenue of the company is considered to be positive information to both investors and the management. But with regard to working capital management, cash generating capacity of the company is very important. In this case about 30% of the sales equal the amount of accounts receivables which indicates that cash generating capacity of this decision is less.
EBIT: The cost of sales increases with the increase in revenue which has finally resulted in increase in EBIT by $260,000 and the overall EBIT remain flat. This provides for indication about the expected expenses and the net realizable income. EBIT has increased as a result of this decision.

Net income: This is the crucial part of any business as this provides an outline about the net amount available for the reinvestment purposes or for distribution. This is the amount of profit which the company has generated, after the implementation of this decision the net income increases but they remain flat because of the EBIT.

Free cash flow: The overall free cash flow of the company before the implementation of Phase 1 decision was not good. By implementing this decision only the top line of the financial statement has improved and net income remained flat which indicates about the less free cash flow generating capacity of the company. Overall free cash flow of the company continues to be average in this Phase.

Total value: The total value will decrease by $225,000 after the implementation of this decision. Apart from sales, there is no improvement in any aspect of the business, like no...

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