What Is the Relationship Between Inventory and Working Capital?
Working capital risk refers to the possibility of adversely affecting the financial status and financial results of an enterprise and causing economic losses due to insufficient working capital and other reasons. It is one of the main financial risks facing the business. Working capital risks are mainly reflected in the following: working capital, as the funds required to maintain the daily production and operation of the company, is closely related to the cash cycle of the company's operating activities. If the working capital is insufficient, the cash cycle cannot be successfully completed, thereby affecting the normal production of the company Business activities.
Working capital risk
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- Working capital risk refers to the possibility of adversely affecting the financial status and financial results of an enterprise and causing economic losses due to insufficient working capital and other reasons. It is one of the main financial risks facing the business. Working capital risks are mainly reflected in: Working capital as
- In general, the main reasons for insufficient working capital of enterprises are as follows:
- (I) Slower cash flow
- Changes in the cash cycle will directly affect the amount of working capital required. If due to various reasons, the company's cash flow rate has slowed down, then the company's demand for working capital will increase. At this time, if the company does not have sufficient cash reserves or borrowing lines, it cannot increase its capital investment, and the original working capital of the company will not be able to meet the needs of the company's normal production and operation activities due to the slowing down of cash turnover. A certain amount of gap.
- There are three reasons for the slowdown of the cash cycle:
- The first is an increase in inventory. Due to the poor sales of corporate products, product backlogs, increased inventory, and extended inventory turnover periods.
- The second is the delay in receipt. Due to customer reasons, the company's account receivables were not recovered in accordance with the agreed period, which resulted in delays in collections and the accounts receivable turnover period was extended accordingly.
- The third is payment in advance. Repayment in advance due to supplier or internal management reasons
- Working capital risk is one of the main financial risks faced by modern enterprises, and it is mainly manifested in the following forms in the daily business activities of enterprises:
- 1. Inventory realization risk. The backlog of finished products and semi-finished products for external sales cannot be realised in time; due to lack of orderly procurement of raw materials, damage to the material inventory stage, inaccurate quantitative ratios between parts required for production, and semi-finished products in the production process Lack of management and other causes cause loss, wasted funds, and increase management costs.
- 2. Accounts receivable risk. Large credit sales for customers
- Working capital runs through the entire process of business operations. Under normal circumstances, the funds advanced by the enterprise in advance are postponed in all aspects of the business activities (funding form) in turn through monetary funds-reserve funds-production funds-finished product funds-debt funds-monetary funds, but the finished product funds debt funds return to the currency Funds are the process of transforming the individual labor achievements into social goods. It depends on the competitive situation. After the sales are realized, the cash inflow generated can enable the company to complete the financial compensation. However, it is impossible for any company to manage the funds in advance accurately. It is true that working capital involves a wide range of factors, uncertain and complex factors are scattered, and it is latent and cumulative. In the ever-changing competitive environment, the overall coordination and anti-risk capabilities of enterprises are very important. At the same time, the demand for working capital fluctuates frequently during the company's existence period, and it is impossible for an enterprise to hold a sufficient amount of capital forever. In addition to the occasional influence of external boundaries, the existence of working capital risk has its significant objectivity.
- On the other hand, in real economic life, it is often caused by management reasons.
- Working capital is the funds needed by the company's daily business activities. Working capital operation is the support of the company's overall capital operation and bears
- Working capital from
- The working capital formula is:
- Working capital = current assets-current liabilities
- = (Total assets-Non-current assets)-(Total assets-Owners 'equity-Long-term liabilities) = (Owners' equity + Long-term liabilities)-Non-current assets = Long-term capital-Long-term assets
- Working capital can be used to measure the
- In order to effectively manage the working capital of enterprises, the characteristics of working capital must be studied in order to carry out targeted management. Working capital generally has the following characteristics:
- 1 Turnaround time is short. According to this feature, it shows that working capital can be
- Strengthening working capital management is to strengthen the management of current assets and current liabilities; it is to accelerate the turnover rate of cash, inventory and accounts receivable, to minimize the excessive occupation of funds and reduce the cost of capital occupation; to use commercial credit to solve short-term capital turnover Difficulties, while borrowing from banks at the appropriate time, using financial leverage to improve the return on equity capital.
- Avoiding risks Many companies often use credit sales in order to realize profits and sell more products. The one-sided pursuit of sales performance may neglect the management of the corresponding receivables and cause low management efficiency. For example, the lack of control over the cash flow and credit status of credit sales, and failure to promptly collect payment, it is prone to the phenomenon that the default of the payment is higher than the actual capital. In this regard, the financial department should strengthen the control of credit sales and pre-purchase business, formulate corresponding accounts receivable and pre-payment control systems, strengthen the management of corresponding accounts, collect and respond to accounts in a timely manner, reduce risks, and increase corporate funds. Use efficiency.
- The value-added accounting profit is the result of the current income and expense cost ratio. At any income level, enterprises must do a good job of controlling internal costs and expenses, and do a good job of budgeting, strengthening management, and reducing unnecessary expenditures, so as to increase profits and increase enterprise value.
- To improve efficiency, financial management should be based on the overall perspective of the enterprise, build a scientific forecasting system, and carry out scientific budgeting. The budget includes sales budget, purchase budget, investment budget, labor budget, cost budget, etc. These budgets enable enterprises to predict risks, obtain various information of funds in a timely manner, and take timely measures to prevent risks and improve efficiency. At the same time, these budgets can coordinate the work of various departments of the enterprise and improve the efficiency of internal collaboration. In addition, under the guidance of sales and expenses, the sales department can have a certain understanding of the market in advance, grasp market changes, and reduce the market risk of inventory.
- Improve the system and clarify the internal management responsibility system Many companies believe that collection of payment is a matter for the financial department and has nothing to do with the sales department. In fact, this is a wrong view. In fact, sales staff are primarily responsible for collecting receivables. If the salesperson is also responsible for collecting and responding to receivables when providing credit for sale, then he will treat each receivable with caution.
- Enterprises that establish customer credit files should set up risk controllers in the financial department, conduct in-depth investigation and filing of the credit situation of suppliers and customers through the risk controller, and set credit levels to implement different credits for customers at different levels. Policies to reduce purchase and credit sales risks. Risk administrators can assess the credit rating of customers from the following aspects: inspection of the registered capital of the enterprise; credit status of the repayment of the account; records of fines for non-payment of taxes; whether there is arrears of payment by the supplier; other enterprises Comprehensive evaluation. The risk manager reports the situation to the general manager based on the inspection results, and then the risk manager, the manager of the financial department, the manager of the sales department, and the general manager discuss the amount of credit for the payment to each supplier and customer after discussion. If more than the approved amount of credit is provided, the salesperson must obtain special approval from the financial manager, risk manager and general manager. If approval cannot be obtained, the sales staff can only reduce the credit scale or abandon this business, so that they can control a large number of bad debts in sales and reduce risks.
- Strictly controlling the credit period shall stipulate the collection time of the accounts receivable, and write these credit terms into the contract to bind the other party in the form of a contract. If the other party fails to collect the response payment within the prescribed time, the enterprise may take legal measures against the defaulted payment company in accordance with the contract and promptly recover the payment.
- Encourage arrears companies to repay their debts within a specified time through credit discounts. The reason why many companies fail to repay their debts in a timely manner is because they do not receive any benefits in a timely manner, and arrears have no effect. This situation leads to inefficient collection of accounts receivables. In order to improve this situation, enterprises can take corresponding incentive measures and give certain credit discounts to companies that actively return money.
- Implement the approval system to implement different approval levels for different credit scales and credit objects. Generally, a three-level approval system can be set up. Audited by sales manager, financial manager, risk manager and general manager. If the sales department adopts the credit sales method, the financial department should first measure the economic benefits and the cost risks arising from the credit sales, and submit it to the general manager for review when feasible. This can improve the efficiency of decision-making and reduce the risks of business operations.
- Strengthen remedial measures Once the payment default occurs, the finance department should require sales staff to step up collection of the payment, and at the same time the risk manager should lower the credit rating of the enterprise; if the default is serious, the sales department should order the sales staff and the enterprise to cancel the purchase and sales business.
- The establishment of an enterprise internal control system mainly includes a series of control systems such as inventory, accounts receivable, cash, fixed assets, and management costs. Violation of the control system shall be punished by those responsible.
- Strictly control expenditures, and adopt planned cost accounting for various expenditures. Strict control measures must be taken for various expenditures that are prone to waste. For example, many enterprises' business entertainment expenses account for a large proportion of management expenses, which results in that some entertainment expenses cannot be deducted in full before taxation. In this regard, enterprises should require sales staff to control hospitality expenditures, and the financial department should determine the appropriate hospitality standards based on monthly sales revenue.
- In short, working capital management plays an important role in corporate sales and procurement, and will have a significant impact on the achievement of corporate profit goals. Working capital management should be the control of sales rather than restrictions, and its purpose is to promote sales departments to reduce sales risks and increase profit levels. Therefore, business leaders should pay attention to the management of capital operations of enterprises.