1. what is you thoughts on this discussion post in one paragraph. Please post be

Question

1. what is you thoughts on this discussion post in one paragraph. Please post below

Three elements of working capital would be inventory, accounts receivable, and accounts payable. The net working capital would be inventory plus accounts receivable less accounts payable. (Berk, DeMarzo, Harford, pg. 585) The element I choose is accounts payable, a current liability. Accounts payable will change because Felicia and Fred will need to order new inventory to produce the new gift with purchase bag. The supplies purchased will have to be paid for through accounts payable. Payments to vendors should be made at the latest day allowed to optimize cash management. For example, if payment terms to a vendor is 2/10 net 30, then if the payment is made within 10 days Felicia and Fred can take a 2% discount on the payment. If not, then the total amount due should be paid within 30 days. To optimize cash management Felicia and Fred should take the discount on day 10 or pay at day 30. Taking the discount at day 5 or paying in full at day 20 is an example of not maximizing accounts payable and cash management. There are two techniques Felicia and Fred can follow to help ensure proper accounts payable management. They are determining the accounts payable days’ outstanding and stretching accounts payable. The first technique coverts the accounts payable balance to days by dividing it by the cost of goods sold converted to days. This can help the firm get an idea of the average amount of time taken to pay vendors. If the average days are more than the terms than they may be taken to long, and if they are less, they could be paying too soon. (Berk, DeMarzo, Harford, pg. 598) Another technique is called stretching accounts payable. Stretching accounts payable simply means a firm is stretching the number of days it takes to pay, passed the terms. This allows the firm to have use of their funds longer. (Berk, DeMarzo, Harford, pg. 599) A firm is wise to practice efficient accounts payable management. Not doing so could result in a poor credit rating, a poor relationship with vendors that could cause a hardship when order supplies, or being known as a less then credible firm that practices unethical behavior. (Berk, DeMarzo, Harford, pg. 600)

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Explanation / Answer

This post is all about efficient Working Capital Management and Optimization of Profits through balance in various techniques of working capital Management.Working capital comprises of inventory , Accounts Receivable and payable and how an increase or decrease in one Component say inventory can be managed to bring down the Accounts payable and Subsequently increase Accounts Receivable. A sound Accounting practise and technique is required for any business to survive tough competition and keep good inerpersonal relationship among each other to effectively Manage the Working capital of the company .

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