AIGNMENT 2 - GOH CHUN PING GROUP 1 .docx - Task 1 P1 It is...

Task 1
P1
It is presumed that all decisions of financial managers are for maximizing the shareholders’
wealth, and working capital decisions are no exception. (Wisdom Jobs, 2010)
As a result, every working capital choice has a risk-return balance; working capital
management has two inherent hazards, one of which is liquidity risk, which is the inability to
pay due liabilities in cash. It's possible that it just happens on particular days. Even so, it will
not only result in a loss of reputation, but it will also make working conditions unsuitable for
achieving the greatest trade creditor terms. Another risk associated with WCM is the risk of
loss of opportunity, which is the risk of having two tiny inventories to maintain production
and sales, or the risk of not providing enough credit to release a sales level that can be
achieved. In other words, this is the danger of not doing so. (Wisdom Jobs, 2010)
It is unnecessary to point out that the existing assets could theoretically be all zeros. In reality,
this is neither practicable nor desired in practise; the corporation wants to reduce working
capital risk, thus all current assets are positive. However, the higher the cost of the funds
employed, and hence the lower the profit, the more money is locked or put in liquid assets.
(Wisdom Jobs, 2010)
M1
1

D1
2
Inventor
y
Purchase
d
Inventory conversion period (90
days)
Inventory
sold
Average collection period (30
days)
Cash paid
for
inventory
Receipt of cash
from accounts
receivable
Accounts payable
deferral period (5 days)
Cash conversion cycle (115
days)
Operating cycle (120
days)

Organizations need effective working capital management but increasing firms and high sales
will have a negative impact on cash flow and throw off the working capital balance. This is a
concern since growing a business means greater expenses and a lack of working capital at a
time when cash is required the most. (dklein, 2021)
To increase sales, a corporation might plant more and faster. To enhance corporate sales, the