Working Capital Management

Working Capital Management (WMC)


Still today we have discussed on cash management and credit analysis. Today we are going to discuss on Simulation Approach. Simulation analysis permits the financial manager to incorporate in his forecasting both likely value of ending cash balances (surplus/deficits) for each of the forecast periods (say, for each month over the next quarter) and the margin of error associated with this estimate. It involves the following steps: First, probability distributions for each of the major uncertain variables are developed. The variables would generally include sales, selling price, proportion of cash and credit sales, collection rates, production costs, and capital expenditures. Some of these variables have the greatest influence upon cash balances.


Clearly, more time and effort should be spent in obtaining probability distribution of these variables. Second, values are drawn at random for the variables from their respective probability distributions and using these values each balances are estimated. Third, the process is repeated several times (say, 1000times). Needless to say, such tedious and cumbersome computations are done on computer.


In practice, the array of possible hedging strategies is quite a bit more complicated. One is required to consider various alternatives and the associated costs and risks in hedging strategies.


December 22, 2008 - Posted by | Assets, Business Flow, cash loans, Credit Analysis, Credit Repair, Credit Rport, Current Assets, Working Capital, Working Capital Management | , , , , , , , , , ,

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