Working capital management in a depressed economy places a greater responsibility on the Finance Manager. In a depressed economy, getting funds to meet up with current obligations are very challenging as business activities experience downturn and getting short term funds from external sources in most cases is a mirage.
The onus in generating funds to meet up with the day to day activities of an organization rests mostly on the Finance Manager. Working capital of a company is the excess of current assets over current liabilities. The Finance Manager will have to devise various means to ensure that the current assets of the organization is over and above the current liabilities to enable the organization meet up with its current obligations as at when due.
In some cases, the handiest solution to ensure a healthy liquidity position in an organization during economic depression is cost reduction. Cost reduction in this situation may include curtailing level of operations such as closure of certain line of business or branch after a critical assessment of the impact of such line of business or branch. Also, work force can be reduced.
Proper review of other outflows can as well be carried out. All these are done to ensure that an organization is liquid during economic downturn. However, care must be taken in applying this measure as it may result into significant loss of income if not properly managed. Emphasis should be on largest value received per naira spent.
However, before further discussions, it is important to define some terms for better understanding. On that note, the following concepts have been defined:
Working Capital: Working Capital has been defined as the net asset of a business, that is, the excess of current assets over current liabilities. It is the resources required to conduct the daily core activities of any business set-up (small businesses, medium businesses or large scale enterprises). Any business which desires to perpetually remain in operations must ensure a healthy level of its working capital by maintaining a sound relationship between the current assets and current liabilities as required by various factors and as defined by the market and its own policies.
Every business needs finance for two purposes: A.) Long term financing which is required to provide facilities upon which the business will carry out its operations and B.) Short term financing which the business needs for the recurring purchase of raw materials, payment of wages and salaries and other day-to-day expenses. It is referred to as Revolving or Circulating or Working Capital.
Finance Manager: A finance manager is a professional who supervises the preparation of an organization’s financial reports as required by law and approved by the organization’s board of directors. The finance manager also creates financial strategies to meet the needs of the organization’s short and long term goals. Responsibilities also include evaluating data to appraise the current and future financial conditions of the organization and supervising investment activities.
Working Capital Management: Management must decide on how to finance the current assets and this is done through the working capital policies. The appropriate level of networking capital is determined by the simultaneous consideration of current assets and current liabilities decisions. There are several financial plans that management can adopt. The most common among them are: conservative, aggressive and moderate policies.
Monitoring and interpreting cash flows and predicting future trends: The Finance Manager has a greater responsibility to closely monitor the cash flow of the organization to reveal justification for every naira spent. He also needs to interpret the cash flow to enable non- accountants in the management have a clearer view of the cash flow position of the organization. It is his duty to forecast the future trends of the cash flow.
Conducting reviews and evaluations for cost-reduction opportunities: The Finance Manager will have to make conscious effort in carrying out cost reviews and evaluations with a view to looking at where to reduce cost.
Keeping abreast of changes in financial regulations and legislation: Running foul of the law as it relates to industrial regulations may lead to payment of fines which is an outflow to the company.
Managing payment and receivable: The Finance Manager will have to make every effort to ensure that the company’s receivables are at minimal level. Also, creditors should be managed as long as possible by delaying payments. However, this must be done in such a way that the credibility of the company will not be eroded.
Framing the credit policy: The Finance Manager has the responsibility to critically re-evaluate the credit policy of the organization. In a depressed economy, default in honouring financial obligations because of the cash problem is eminent.
A firm should maintain a sound capital position. Both excessive as well as inadequate working capital position are dangerous from the firm’s point of view.
The dangers posed by excessive working capital are that it results in unnecessary accumulation of investment. It is an indication of defective credit policy and slack collection. It also makes management complacent and degenerates into management inefficiency.
Inadequate working capital on the other hand is also harmful and has the dangers of stagnation of the firm’s growth, difficulty in implementing the operating plans to achieve the firm’s profit target. It also leads to under-utilization of a firm’s fixed asset. Hence, the Finance Manager has to be up and doing in the management of working capital in a depressed economy.