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Working Capital Management

Décor a Green will forecast cash flows to determine the minimum cash balance needed and typical cash inflows and outflows. This will allow them to take short-term loans to fulfill cash needs rather than long-term loans with high interest. For receivables, Décor a Green will offer a one-month credit period since their target market can afford interest and defaults are low. They will incentivize on-time payments and push payables for frequent customers. Décor a Green will send late payment letters after three months and pursue legal action if needed. They will pay payables on time but try to stretch payments without penalties through supplier relationships.

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Ashfaq Rahman
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37 views

Working Capital Management

Décor a Green will forecast cash flows to determine the minimum cash balance needed and typical cash inflows and outflows. This will allow them to take short-term loans to fulfill cash needs rather than long-term loans with high interest. For receivables, Décor a Green will offer a one-month credit period since their target market can afford interest and defaults are low. They will incentivize on-time payments and push payables for frequent customers. Décor a Green will send late payment letters after three months and pursue legal action if needed. They will pay payables on time but try to stretch payments without penalties through supplier relationships.

Uploaded by

Ashfaq Rahman
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Strategy

Working Capital Management

Cash Management

Forecasting cash flows is necessary to allow effective management of working capital. In

order to forecast it is needed to know:

a) Minimum Cash Balance: Determining the amount of cash buffer as protection from

unexpected cash needs. It is also important to provide the financial flexibility to take

advantage of attractive opportunity.

b) Identifying typical cash flows: determining the amount of cash inflows and outflows

from the projected financial statements.

As a result of forecasting Décor a Green will know the minimum amount of cash

required to hold in hand so that to remove the delay for not having cash when it is required

for any activity. Again, as Décor a Green will know the approximate amount of cash

required, it will, instead of taking a long term large loan with a high interest rate, take short

term loans with lower interest rate that will fulfill its required cash amount. Consequently,

the amount of interest payment will increase too. And lastly, Décor a Green will not held

any excessive amount of money which could have been used to buy new inventories or pay

the loans and thus decrease the opportunity costs.


Receivables Management:

As the target market is affluent society of Dhaka, they would not mind paying a high

interest rate in case they want to pay late. Thus if Décor a Green allow credit, it will eventually

increase the revenue. This is because, to finance the cost in case of credit sales Décor a Green

has to finance the costs by borrowing from financial institutions and charge a markup one the

buyers as they will not have any problem. It is also to be mentioned that the chances of default

is very low in this market segment. Keeping all this in mind the company will allow one month

credit system because a) the amount is relatively small, b) the competition in the market is low

and c) the goods are relatively inexpensive. Now to ensure that customers pay in time:

a) Cash discounts on future services will be allowed if payment is on time. This will also

increase the repurchase of Décor a Green’s products and services.

b) “Pushing Payables” will be allowed for customers on the basis of how often they pay

their dues.

c) Cash discounts will be applicable if buyers pay before time as the company can use

the capital for new investments.

Collection effort:

Décor a Green will send out a delinquency letter informing the customers of past-due

status if they have failed to pay their dues for more than three months. Décor a Green chooses

not to send the letter before this period because, as the customers are from affluent society

they may feel insulted if the company sends letter within a month of the due date. If the
customer is heavily suffering from financial problems then the company will take legal action

against the customer because if the customers files for bankruptcy than Décor a Green will

become a unsecured creditor.


Accounts Payable:

a) As paying up early in means losing opportunity of using the capital while paying late

means allowing the creditor to enjoy the benefits of penalties, Décor a Green will

strongly emphasize on paying its payables on due dates.

b) Décor a Green will try to build strong relationship with the suppliers to have the benefit

of “stretching payables” where the suppliers accept late payments without any

additional charge. This would allow the company to invest the capital during the “grace”

period.

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