Financial Administration Within Working Capital

Financial Administration within working capital

To understand and understand why the financial administration is related to the capital administration within a company, the terms must be known. Therefore, administration that comes from Latin, is the way to perform exercising control of the direction of something peculiar, determined or defined. In addition, it is planned, organized, directly and controls the resources available for a company to achieve planned objectives and goals and meet for the well -being of the company. Within the resources that the person administers can be material, human, financial, etc. In this case we will talk about the financial administration that is one of the most important branches of the sciences since it is aimed at people who need to have the knowledge and ability to make wise decisions in the way they manage money in a company through theImplication of the participation and use of market exchanges, investments and acquisition or sale of products or services. In such a way that it can increase utilities with focus on liquidity and profitability so that these resources can be lucrative for business growth in the organization that exerts this position.

On the other hand, working capital is defined as the resource or requirement that the company needs to operate, is the current asset that includes cash, short -term investments and inventories, etc. The way to know working capital is to subtract current liabilities from current assets.

The basic equation of the “C = A-P” accounting cycle. Because the company needs resources for its operation to be efficient the resources with which they operate, these available to meet the needs of the company. It is the way in which the cash flow is generated to convert inventories into accounts receivable and these in cash. Then, the net working capital reflects what amount of goods the company has so that it can continue to exercise its work while complying with the payments of liabilities in a short term.

The administration is used in private and public companies since it is necessary to have a control that manages regulations that are used with agility to work successfully. In daily living in these times the administration requires that it be updated to be able to compete with competitive advantages and social factors. The elements that interact so that the administration is organized depends on the fact that each project is planned with the expectations of the objective. Each of the aspects must be evaluated so that the person who integrates the work team can provide and perform their task to complement with each of the parts of the system. Also, the flexibility of incorporating resources towards the areas that need to transfer to transfer or incorporate other aspects that can increase the company’s financial capacity.

On the other hand, ethical and professional values are those that will distinguish the mission or vision of the company. Since the values are what will let them know what they believe, as will be and how the company will proceed so that expectations can be defined for each of the people who make up the company. In this way, it will give an image to the public to which it will be directed to capture the credibility of the product or service they provide towards the consumer. Then, all the tools will be used to carry out the analysis and improve decisions to maintain the capital of the company. For this reason, the purpose of the financial administration is to be able to potentially lead that all economic goods are responsibly registered so that the company meets the business objectives. On the other hand, for the company to grow and position itself within the financial field, it is essential to make investments since they allow mobilizing the economy of the company and towards others, allowing a certain way to generate employment. In the financial administration there are some concepts that give the possibility that the conclusion is not expected as it originated, this is the risk and that, even if it is not expected, fruits providing growth and unforeseen gains, this is the benefit. There are several types of risk such as the systematic one that unites a set of economic, monetary, political and social factors that will develop variations in the profitability of the asset, such as a recession or changes in a bank for the economy. On the other hand, the non -systematic system, which affects only profitability by action or bonus, that is, it is the one that arises from the uncertainty that a company can surround the business for the development of the business. This risk could be considered as the signing of a new contract or the new product of the competition. Both risks have their strategies to be eliminated either by investment or diversification. The risk of an asset will depend on the expiration and that the issuer can comply with the profitability and financial amortization clauses that were set. Since, the greater the probability of not complying, the risk will be greater since it depends on the issuer’s solvency and the guarantees that have been incorporated.

Therefore, the financial administration includes working capital within the resources used so that the company can operate efficiently. For this reason, working capital is the current asset which allows the company to meet the needs that the company has in the proposed time. To obtain the net working capital, the current liability of the current asset must. Financial administrators use a formula to determine the net working capital that is related to current reason, which tells us that for each weight the company must. Financial reasons are indicators used in the world of finance to measure or quantify the economic and financial reality of a company or unit evaluated and its ability to assume the different obligations to be taken to develop its corporate purpose. For this reason, they allow comparatives between the different accounting or economic periods of the company to know what the behavior of this has been and thus be able to do for example short, medium and long term projections, simply make evaluations on past resultsto take corrective if there is. So, they are ratios and indicators that allow identifying particular situations of the structure of a company, which allows to evaluate its management and performance.

However, the relationship between the concept of cash flow with the working capital since when the capital increases guarantees the existence of the company so that it can continue to handle within the industry to which it is dedicated. Between the profit and the working capital, the first reflects, but it is not invested in the company, however, the working capital is the percentage of the cash flow that was used or which maintains the company operating. It can be said that when there is a substantial amount, the company can make investments for this way to continue increasing production and increases its gain. It is already necessary that the company needs resources for its work such as raw material, stationery, labor, maintenance, advertising, among others. Therefore, all these resources must be available in the short term. So, if there is a lower liquidity in a financial asset, the expected profitability is greater, that is, we will make us harder to get out of this asset when you need to leave it. Since profitability is the benefit obtained by an asset in relation to the cost of acquisition, profitability = benefit/acquisition cost. We analyze with the following example, if a bonus is purchased with a value of 1,000 and if 1,030 a 30% benefit will be obtained by the profitability obtained. 30/1,0000 = 0.03 (3%). We could say that at greater risk there will be greater profitability, at less liquidity there will be greater profitability and the greater the liquidity there will be less risk. Therefore, if the issuer cannot face the conditions, the investor will require payment and the greater the profitability to assume the risk. Also if it becomes difficult to convert the active into cash then the profitability will be greater, since the purchase capacity is currently sacrificed. Also if the easiest converting the active into money minor will be the risk that is being exposed.

The determination of the financing combination is one of the decisions that must be made in relation to the circulating asset and liabilities taking into account the approach of the financing alternative. The dynamic approach in which the company must finance the short -term requirement and long -term need with long -term financing, that is, the company obtains short -term background sources, the needs come from long -term funds. In this approach the low costs will result in high profitability and greater risk, it can be more aggressive if part of the fixed assets are financed with circulating liabilities. The conservative approach all requirements will be financed with long -term funds and short -term funds are used in case of unforeseen situations, it is more expensive if it is maintained for a year, but it is less risky because the net capital of working will be maximized,since cash surpluses can be invested in negotiable values and could be sold at any time of need. Therefore, the dynamic approach is more profitable, although more risky in the way of using the funds and the conservative approach that will be expensive as a result of the interests paid by the money not used and is low at risk since it will possess a net capitalof greater work because its circulating assets are being financed in the long term. The most important thing is what is the approach that is used is to obtain advantages to produce moderate profitability and a risk that is acceptable to the company.

The Financial Administration dedicates to working capital a longer time so that companies can handle the current assets and liabilities accounts, in this way they manage to balance the net working capital so that the company has a feasible economic solvency. Therefore, circulating assets must be enough to cover the short -term liabilities, in order to consolidate a reasonable safety margin. In this way, the objective of the administration is to handle each of the active and short -term liabilities in the company so that it can reach an acceptable and constant level in the net capital of work. For this reason, the financial administration is a very important tool within the accounting cycle so that each company can comply with the responsible and integral practices for the company that works. Also, be committed to each process that is carried out next to the work team so that they can meet the objectives set in the company. In this way, they will make the company maintain all the resources available to maintain position in the industry and not have difficulties that make them insolvent.