financialtreat – will explain What is Mithril Capital Management? Below we will describe in detail! that you will get in the following article. let’s look at this article carefully!
Every business needs money to be able to finance its daily operations, such as purchasing raw materials, paying employee salaries, paying for electricity, and others. The money spent on operating needs is expected to quickly return to business income through the sale of products or services. And usually it is referred to as mithril capital management.
Mithril capital management is the management of current assets and current debt. If working capital management is mismanaged, this can hamper your business operations.
What is working capital management? Below we will describe in detail!
Conversely, if the management is carried out effectively and efficiently, it will provide benefits for business growth in the long term. Who wants his business to continue to grow and make money?
To get to know more about working capital management, its concepts, and how to calculate it, let’s see the discussion below!
What is working capital management?
Working capital management has two basic elements, namely assets, or current assets, and liabilities, or current liabilities. In accounting, working capital management is a strategy to maintain a balance of current assets and current liabilities, such as managing cash flow, inventories, and accounts receivable.
Working capital management plays an important role in a business; every decision from this management can have a direct effect on the level of profit, risk, sales, and even the company’s stock price. It is also directly related to increased sales and the funds needed to cover current asset costs.
Working Capital Management Objectives
The purpose of working capital management is to allow a business to manage its current assets and current debt so that it can get good net working capital and guarantee the level of business liquidity. These current assets can be in the form of cash, securities, receivables, inventories, and funding needed to support current assets. The other objectives of working capital management include:
- meet business profits or losses,
- optimize spending within a sales level,
- obtaining funds from investors because it has a positive financial ratio,
- can appreciate working capital so that payments for needs are always made on time,
- protection from working capital crises.
Working Capital Concept
Quantitative Concepts
The quantitative concept in working capital management is the quantity or amount of funds in the element of current assets. Current assets have funds that either rotate back in a relatively short time or can return in their original form.
So, working capital in quantitative concepts is the total amount of current assets owned by a company. Working capital in this sense is often also called gross working capital.
Qualitative Concepts
If the quantitative concept is only related to the amount of current assets, in this qualitative concept, working capital refers to the amount of current debt or debt for which payments must be made immediately. Thus, some current assets must be available to finance the company’s financial obligations that must be carried out immediately and cannot be used to finance operations.
The goal is that the company can maintain its liquidity, that is, meet its short-term obligations. Qualitative working capital is also called net working capital.
Functional Concept
The basis of the functional concept is that funds are embedded as capital, and the funds issued have a function to generate income for the business. The concept is that part of the funds are used to generate income in the accounting period or current income. Well, some other funds were also used in the accounting period, but not all of them were used to obtain current income. Part of the fund aims to generate income for the next accounting period or future income.
For example, a clothing business invests some of its funds in government bonds. The fund then generates current income in the form of coupons or interest. This clothing business was established with the aim of doing clothing trade, not to invest.
So, the funds invested in the bonds can later be invested in the textile business for purposes such as business development or buying new machinery or raw materials. The fund is categorized as potential working capital.
Cash and inventory are forms of working capital owned by a business. Some receivables can also be included in working capital and some in potential working capital.
If a business sells goods on credit, it can have trade receivables whose amount includes sales proceeds and profits. Receivables invested in the form of products sold are also classified as working capital; some funds are profits, and some are potential working capital.
For example, a company sells laptops with a 40% profit margin. The company has receivables of Rp12,000,000; 40% of Rp12,000,000, which is Rp4,800,000, includes potential working capital, and 60% of Rp7,200,000 is working capital.
Non-working capital is a fund that does not generate current income; if it turns out to produce current income, it is usually not in accordance with the main purpose of establishing the business.
Funds invested in fixed assets are non-working capital. For example, a manufacturing company has invested funds in machines worth IDR 50,000,000 with a useful life of 5 years. Spending money on the machine has two purposes, namely, some of the Rp. 10,000,000 has a function to produce current income in the accounting period, and the rest has a function to produce income in the next accounting period (future income). So, the portion of fixed assets included in working capital is depreciation for the period, which is IDR 10,000,000, and the remaining owned at the end of the first year, IDR 40,000,000, is included in non-working capital.
Read more financial management:
- Definition and Function of Forklift Fleet Management
- Explanation of Property Management Answering Service
Conclusion
Working capital management is a strategy to maintain a balance between current assets and current liabilities. Such as cash flow, inventories, and accounts receivable. To find out the amount of working capital needed. One can use the average balance method or the cost element method.
A business needs to do working capital management to optimize expenses at the sales level. Get funds from investors because it has a positive financial ratio. Appreciate working capital so that payments for needs are always made on time. And have protection from working capital crises.
I hope the information is helpful!