1.0 Background to the problem
Many organizations which are profitable on paper are required to end trading due to failure to meet short-term debts when they mature. An organization must manage its working capital in order to stay in business. It is also the habit of most of the organization to prefer purchasing goods on credit basis rather than paying cash, this is because the system ensures them of getting items even at a time they fall a shortage of cash or that the cash they have at a point of time can be invested in other things to generate more income. However the problems arise when it comes to the point of paying back their debts especially when the business has not enough cash. Simply looking it is safe to the side of the debtor but becomes a serious problem to creditor’s side. If the creditor has many customers who buy on credits and fail to pay back their dues at a required time, the business enter into the problems of lacking enough fund to manage their day to day operations hence working capital problems. Management must ensure that a business has sufficient working capital. Too little will results in cash flow problems, highlighted by an organization exceeding its agreed over draft limit, failing to pay suppliers on time, and being unable to claim discounts for prompt payments. In long run, a business with in sufficient working capital will be unable to meet its current obligations and be forced to cease trading if it remains unprofitable on paper in Financial Management and policy. (James C. Van Horne, 2002). It should be taken into mind that, organizations are formed with specific missions that is to be attained. However its accomplishment needs high struggling to achieve those objectives, strategies and goals. Large number of organizations fail to reach their intended goals, however if reached are at a very minimal point because of poor managing of working capital. Hence, it is important to give a reasonable attention...
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