Inventory management is another important element of working capital management and requires that the inventories of the firm are managed in the most efficient manner. The inventory management would require that the firm maintain the economic quantity of inventory which not only reduces the cost of storing and managing the inventory but also ensure that the firm never runs out of the stock. Further, slow-moving inventory items will indicate that the firm’ s product may not be saleable in the market whereas fast moving inventory might indicate that the firm may run out of the stock.
The last element of working capital management is the accounts payables management. A good working capital management practice will ensure that the firm takes optimal use of this spontaneous financing an attempt to take full advantage of it i. However, the overall cost of not paying for purchases on time shall also be taken into consideration. It is generally, therefore, argued that firms shall pay for its accounts payables at the end of credit extension period in order to maximize the benefits of this spontaneous financing. Long-term financing is often used for the purpose of capital expenditure and expansion of the business.
This may include expansion of the current operating capacity of the firm, extending the reach of the firm into new markets or spending funds on research and development etc. a) Issuance of Stocks: A firm can obtain the permanent source of long-term financing by issuing common stock through primary markets. However, the owners of common stock of the firm also become the owners of the firms with full voting rights. As such the control of the existing management or owners, therefore, will be diluted.
It is also important to note that obtaining financing through the issuance of stock can be expensive as the firms not only have to meet the requirements and regulations for listing but will also have to pay for the arrangement of the road shows etc for the subscription of the stocks. It is, however, important to note that unlike other sources of finance, firmly do not have to repay this type of financing and shareholders can easily sell their shares in the secondary market against the current market price which can be fetched by that particular stock in the given stock market. b) Another source of financing is that of the issuance of long-term bonds wherein firm undertakes to repay the debt over the period of time.
By issuing bonds firm actually will not allow the bondholders to have the voting rights, however, firm pay interest against the funds borrowed through bonds? The main strength of obtaining financing through bonds is that it is relatively cheaper to arrange with less regulatory restrictions.
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