A Characteristic Example Of A Good Working Capital Model


One should clearly analyze the practical sides of the working capital of a firm to effectively handling it. Some of these measures include

Minimizing the inventory time period allocated for holding of the required standard materials. This can be established by

  • Avoid ordering in bulk quantities of the basic materials mainly for discounts intention and make sure you buy only the specific volume to meet the immediate making process.
  • Considerably maintaining the buffer stocks at an average stock level without probably taking a chance of the stock out situation.
  • Effectively decreasing the lead period allocated to the dealers, without further stepping into a sort of lacking conditions.
  1. Obtaining the credits from the dealers as soon as possible
  • Extension of the dealing period can lead to dropping of ideal discounts that are usually made on the apt payment value. This can adversely affect the financial status of the company that can be initially calculated with other types of source funding.
  • The most important point to be noted before sanctioning such extension period is that they can gradually dissolve the goodwill or motivation of those goods suppliers. This can further create a condition of not meeting the urgent raw material needs.
  1. Choosing the optimal time period for goods production and for possessing finished inventories.
  • By doing so, hundred percent cost savings are obtained and quantity returns can be ensured in terms of production without quality sacrifice.
  • Additionally, the savings parameter obtained from lowered inventory handling should be constantly iterated against the rate of inventory out together with comparing its effect on customer service.
  1. Another step to effective working is by lessening the time period allocated for average debt collection.
  • The overall cost of administering can be dropped by accelerating the debt collection process and also, the sales factor should be constantly noticed due to plummeting the credit period.

Analyzing an ideal cash balance model

Baumol’s Structure: This is an example of economic inventory management type.

  • The main theme of this model is like it uses a constant rate of money per a known period and also includes the marketable securities retaining cost.
  • It can be represented as a function of different parameters like C or the minimum balance maintaining cash, For the whole amount needed per year, T or the transaction cost between cash and securities and finally, r or interest rate on saleable securities.
  • As per the model, the firm uses the cash C until it reaches to zero and is instantly filled with another C equivalent.