Effect of revenue increase on the firm’s working capital policy
Revenue of a company affects the working capital accounts such as account payable and receivable and the inventory. Increase of revenue may have either a negative or positive effect on the working of capital accounts, and depends on how fast a company changes sales into current assets or cash in order to maintain its current liabilities.
A current asset minus current liabilities is equal to the working capital. A company, whose working capital is positive, has sufficient short-term assets that can help pay off the current liabilities. On the other hand, a company having a negative working capital cannot meet up its short-term responsibilities using its current assets. The working capital ratios therefore determine the operating efficiency of the management. The ratios that make use of working capital are the current ratio, which include the current assets or liabilities, and quick ratio, which are current assets minus inventories. If the ratio is greater than one, then it’s an indication that a company is able to manage its short-term fiscal obligations.
Recognition of revenue does not direct to immediate arrival of cash but directs to accounts receivable, an asset that is short-term. When the revenue increases, the accounts receivables also increases, reducing the inventories, and perhaps the account payable increases. When the company purchases more products, the available inventory is used. Decrease and increase in accounts payable tells how a company utilizes short-term finance to fund the operations in the company. Increase in the accounts payable means that the company uses the vendor finance to fund the ongoing operations. Preferably, the company gathers money from the accounts receivable, and uses the profits to compensate for the down account payable.
Microsoft organization company working capital is the measure of health and efficiency within a short-term. Since working capital is the current asset you less the current liabilities, hence the twenty percent increase means that the company is supposed to pay off all its short-term liabilities.
Twenty percent increase in revenue raises the revenue, and with this increase the company is supposed to invest in dealer network and labor structure since one of the biggest supply bases within the industry is the just segment, which the company is notable to afford. The company should be aware that domestic competitors are out of cash in some months and therefore calls for the company to ensure that capital is available for the industry.
The company should also payoff the short-term loans in order to maintain the industry. With this, it can the company can benefit consumers through providing resources tat are priced reasonably in capital, also providing more credit to dealers and consumers. Company can also use the present business markets for funding recurring needs such as long-term and short-term loans. If the company goes bankrupt, then it means dealers, supply base and creditors will be disrupted, and therefore it should spend in paying off long-term and short-term loans.
Looking only on the effects of decreasing or increasing of revenue on working capital isn’t enough, and therefore as an analyst one must look dipper in the accounts to find out physically how the working capital is made up since it is the one that indicates the financial strength and health of the company. For instance high inventory level joined with declining sales rate indicates an outdated inventory, and the company may give discounts to the consumers in order to get rid of the unwanted products hence its profits reduce.
High levels of accounts payable together with low levels of accounts receivable means that the company is not capable of paying the vendors punctually or relies on vendor financing, and high receivables may well indicate that the company has trouble when collecting from the consumers.