The major Components of manufacturing and working capital consist of raw materials, components, sub-components, labor and other resources. These components can be broken down further into plant, equipment and supplies. The major Manufacturing and working Capital investments are mainly separated into three categories: fixed cost, variable cost, and wholesale and retail. Fixed cost investments include salaries, materials, machinery, operating expenses, depreciation and taxes.
Fixed cost investments include the purchase, construction, and plant and equipment financing. Variable costs are those that change with changes in the economy or with the market conditions. Fixed costs are variable costs such as travel time, non-cash salaries, insurance, accounts payable, accounts receivable, and capital advances. Investments in plant and equipment represent future capital improvements. These capital improvements can be reinvested to enhance manufacturing efficiency and productivity.
The major Components of manufacturing and working capital Management are: Sales, Marketing, Administration and Finance. These are the 3 operational processes in any business. Proper management ensures smooth flow of cash. Poor management also results in poor utilization of sales, marketing, and administration.
Sales represents the source of income for the company. With sales, the company earns a profit. Proper sales and marketing strategies are crucial to maximize the company revenue. The key function of marketing is to acquire, retain, and continually motivate new customers.
Equipment represents the value of the manufacturing assets used in the production process of the company. Proper management ensures that these assets are used efficiently to minimize the cost of production. Proper utilization of plant and equipment also reduces inventory requirements. The company needs an adequate number of skilled workers to perform its manufacturing functions. The role of manufacturing businesses in providing working capital to the company is through financing and loans.
Manufacturing and working capital play a vital role in business cycle and financial decision making. Proper management focuses on improving the quality and quantity of manufactured goods through proper production processes and using correct working capital tools. Management also facilitates better utilization of resources by streamlining production processes. It improves overall profitability through better utilization of raw materials, labor, capital, equipment, and technology.
The role of financing in manufacturing and working capital is to provide necessary funding for the various business activities. Proper funding facilitates expansion of the manufacturing facility. It also facilitates better utilization of existing resources. Proper management of working capital facilitates the smooth running of the business by minimizing operating cost. Managing working capital properly leads to better utilization of profits and market share.
Business process re-engineering is an important aspect of effective working capital management. It helps in eliminating unnecessary duplication of functions across different units of the companies. Multiple procedures and operations are removing to make efficient work processes that can be used to increase operational productivity, reduce costs, increase manufacturing capacity, improve customer service, and gain competitive advantage. In addition, it improves overall management effectiveness. Therefore, proper management of working capital assures timely delivery of goods and services.
With the advent of electronic and computerized manufacturing processes, the role of working capital has increased even more. Large scale production requires a large amount of money for buying raw material, tools, and machinery. Moreover, manufacturing plants may need additional space for storing finished products until they are ready for distribution. In all, manufacturing plants consume a lot of money.
Proper capital budgeting is essential for the smooth functioning of any business. Capital budgeting determines the total amount of money required for specific business operations. Thus, management uses working capital budgeting to determine initial assets and liabilities as well as short-term and long-term liabilities. Proper management of capital assures smooth functioning of the company.
Proper capital budgeting involves several factors such as current asset and liability positions, cash flow, reserve funds, and potential growth opportunities. Good management of working capital also determines the company’s capability to absorb losses and cope with sudden economic shifts and events. If the business is able to survive these shocks, it will be in a stronger position to earn high profits. Proper capital budgeting allows businesses to adjust to changing market conditions, competitive threats, and economic fluctuations.
Proper management of capital budgeting facilitates effective management of the business. It also minimizes the risk associated with the business. When operating a business, one needs to identify the risks and manage them. The role of working capital budgeting is to identify risks and manage them accordingly. Hence, it is indeed a significant aspect of business that should be given proper attention.