Working capital management is an essential part of corporate finance theory and practice. It entails the management of an entity’s short-term assets as well as its short-term liabilities – in other words, short-term financing and investment decisions of a given firm (Singh et al., 2017). The primary purpose of working capital management is to ensure that an entity has sufficient funds to cover its operational expenses and short-term maturing debts at any given point in time. Since, as a rule, managing these assets and liabilities requires payments to be made in cash, the majority of firms have a substantial portion of cash blocked as working capital (Singh et al., 2017). Apart from precaution and anticipated transactions, firms may also hold cash in the form of working capital to use for the speculation on the market.
Working capital management includes several specific components. These are inventory management, management of accounts payable and accounts receivable, and cash management (Singh et al., 2017). Inventory management refers to managing not-capitalized assets, such as the goods produced. Accounts payable is the liability that includes the company’s debt to its suppliers. Accounts receivable is an asset that includes claims for payment to an entity that can potentially be legally enforced. Finally, cash management is the process of managing the cash flows in a given organization, which includes financing, operating, and investing activities. As mentioned above, all these components only pertain to the working capital management only insofar as they represent short-term rather than long-term assets and liabilities.
Any organization must have a reasonable anticipation of financial inflows and outflows related to its activities in both short-term and long-term perspectives. As a rule, when this estimation reaches forward further than one year, it is called the financing plan, and when the evaluation covers a period within a year, the document drawn to reflect it is called a cash budget (Zamfir, 2018). Consequently, the cash budget is an essential element of managing the current assets of a given business entity, usually from a short-term perspective.
There are two primary components to a cash budget, related directly to the firm’s inflow and outflow of cash. The first of these components are receipts, which are the payments that are expected to enter the treasury of an entity during the period for which the cash budget is drawn (Zamfir, 2018). The second is payments, which represent the financial flows to exit the treasury in a specified period (Zamfir, 2018). Both receipts and payments may be divided into operating and non-operating – that is, generated by the firm’s main economic activity and its auxiliary activities. When properly drawn, the cash budget will demonstrate whether an organization positive or negative health balance – and, therefore, whether it has or does not have short-term financial difficulties. Moreover, cash budget supplements other related documents, such as sales budget, production budget, procurement budget, general administrative expenses budget, and others. Thus, the cash budget is a potent managerial tool necessary to govern any organization’s current assets, such as operating and non-operating receipts, during a specified period.
The yield curve is one of the critical indicators of economic growth. It demonstrates the yields offered by various bonds as compared to their term to maturity (Choudhry, 2019). As such, it demonstrates how the bond market is trading currently, but can also be used for predictions of what will happen in the market in the future. Consequently, the different slopes of the yield curve have different implications for economic growth in the foreseeable perspective.
There are three basic shapes that a yield curve can take, each one with its implications for economic growth. If the yields are higher for the long-term bonds and lower for the short-term bonds, this situation creates a normal yield curve. The normal yield curve, as the name suggests, indicates that the situation is stable in the economy, and one may expect economic growth in the future (Choudhry, 2019). If short-term yields surpass the long-term yields, it produces an inverted yield curve. The inverted yield curve indicates that investors expect long-term bonds to fall in the foreseeable future – therefore, it is likely a sign of the impending economic recession (Choudhry, 2019). Finally, a flat yield curve occurs when yields are similar for long-term and short-term bodies alike. It is a rare occurrence that does not persist for prolonged periods, as, given the equal yields, investors have no incentive to buy long-term bonds instead of short-term ones (Choudhry, 2019). Usually, the flat curve demonstrates the economy’s transition from recession to expansion or otherwise and, as a consequence, does not persist for a long time.
References
Choudhry. M. (2019). Analyzing and interpreting the yield curve (2nd ed.). Wiley.
Singh, H. P., Kumar, S., & Colombage, S. (2017). Working capital management and firm profitability: A meta-analysis. Qualitative Research in Financial Markets, 9(1), 34-47.
Zamfir, M. (2018). The cash budget: A short-term forecast tool for the financial statements of economic entities. Ecoforum, 7(2).