Learning Team Reflection Week 3 – Working Capital

Learning Team Reflection Week 3 – Working Capital

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Learning Team Reflection - Week 3

Working capital may not be the first thing on the mind of a new business owner, but it is not to be overlooked or underestimated. Working capital management is the day-to-day management of the firm’s short-term assets and liabilities (Parrino, Kidwell, & Bates, 2012). The effective management of working capital directly affects the ability to run a business. Specifically, mismanaged working capital has the potential to bankrupt even a profitable business. This happens when a business defaults on debt, which results in bankruptcy. For this and other reasons, it is crucial for business owners to focus on effectively managing the working capital. This paper discusses the management of working capital by Finagle a Bagel and the reasoning behind it.

Working Capital Strategies

Finagle a Bagel like all businesses track items that affect their working capital such as their current assets and liabilities, which are the main factors that influence the businesses capital and its ability to stay afloat. Businesses look at various strategies to use to gain working capital. A business tool that can help establish the working capital is the operating cycle. Operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the products, and receive cash from customers in exchange of the goods (Bragg, 2013). Calculating the amount of days, the sale of the inventory is also a factor in the operating cycle. Alan Litchman, one of the owners of Finagle a Bagel made it clear that if you were to purchase an asset for the business like a piece of equipment, it is imperative to consider the fact that the returns from the purchase must be significant enough to warrant the purchase. Alan reasoned that a large portion of the revenue from sales goes to pay for administrative and other expenses, factors calculated after purchase. Therefore, it is important to know that purchases made will contribute to greater sales generating a profit, or the effort may not be worth it.

One major tool used for obtaining working capital is to build on the grounds of credit. Finagle a Bagel like many small businesses uses trade credit, credit received for the exchange of a service or product with payment expected at a later period (Parrino, Kidwell, & Bates, 2012). For example, Finagle a Bagel works with a flour company to purchase the flour for their products of bagels, and Finagle a Bagel has 21-30 days to