Explain the importance of working capital s it relates to the budget process

Notional, Sunk And Committed Costs Earlier articles relate to relevant costs and other alternative costs like opportunity cost, incremental or differential cost and avoidable costs. Below are more costs that we need to understand before we embark on tackling short term decisions making questions often asked by the various examination boards. Notional Costs Notional costs are also known as imputed cost.

Explain the importance of working capital s it relates to the budget process

September 13, ; Accepted: November 20, ; Published: Also, current liabilities are one of their main sources of external finance in view of their difficulties in obtaining funding in the long-term capital markets and the financing constraints that they face.

Small and medium-sized firms use vendor financing when they have run out of capital. Thus, efficient working capital management is particularly important for smaller companies.

Short-term financial operations

However, the secondary objectives of the study are: Of more importance is its function which is primarily to support the day-to-day financial operations of an organization, including the purchase of stock, the payment of salaries, wages and other business expenses and the financing of credit sales.

Working capital can be defined as the capital available for conducting the day to day operations of an organization represented by its net current assets Adeniji, The working capital is the life-blood and nerve center of a business firm.

Current assets are the assets which can be converted into each within an accounting year. It could also be regarded as the current assets less liability of the firm. Akinsulire refers to working capital as the items that are required for the day-to-day production of goods to be sold by a company.

It can be defined as the excess of current assets over current liabilities. Working capital management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other.

Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital.

Economic Perspectives: The Circular Flow Diagram

A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio.

Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.

Efficient working capital management is necessary for achieving both liquidity and profitability of a company.

Explain the importance of working capital s it relates to the budget process

A poor and inefficient working capital management leads to tying up funds in idle assets and reduces the liquidity and profitability of a company Reddy and Kameswari, Efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets.

Working capital management could vitally affect the health of the firm Sagan, Industry practices, company size, future sales growth of company, the proportion of outside directors on a board, executive compensation current portion and CEO share ownership significantly influence the working capital management efficiency of a company."Completing a project" is not the same thing as ending the project management process.

Simply finishing doesn't ensure that the organization benefits from the project's outcome. Accounting for nearly half of the entire marketing budget of products, the physical distribution process typically garnishes a lot of attention from business managers and owners.

Module 1: The Total Solution Life Cycle

It is a plan for saving, borrowing and spending.[1] A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods.

In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: 1. The "budget" represents the plan that details out anticipated revenue and expenses related to the investment during a particular time period, often the duration of a project.

The term "capital budgeting" is the process of determining which long-term capital investments should be chosen by the firm during a particular time period based on . Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business.

A hallmark of good business management is the ability to. • Explain the relationship between budgeting and strategic planning.

• Define chart of accounts, responsibility reporting, and flexible budgets. • List and describe the phases of budgeting.

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Organization's size and span of control