Managing Costs Through the Provision of Working Capital

2021-05-05 11:35:39
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For a firm to attain an increment in the working capital it needs to: increase revenue, acquire long-term instead of short-term debts, and minimize its long-term business debts as well as sell long-term assets. These three steps will help the organization to have an increment in its profits. However, in my view, this approach will not work for Headliners as it has been in operation for only two years, and, therefore, has not acquired substantial assets that it can offset. Another problem is that even if Headlines sought to replace its short-term debts, this would only save the situation for a short time, and it would be forced to pay for them in future. Moreover, replacing short-term debts would possibly double the problem since its future debts would also increase. Thirdly, although generating more profits has proven to be amongst the best ways of elevating working capital, Headliners cannot use this strategy since it is new in the market, and, in consequent, has many competitors and has not secured a strong customer base. Fourthly, for Headliners to offset its long-term debts, it means that it will be forced to cut borrowing, which will eventually weaken their ability to buy more assets. Therefore, provision of working capital will not work Headliners as this strategy favors businesses that have operated for many years. The best strategy that it can employ is to come up with a market strategy, which will popularize its beauty salon and bring in more customers.

Increasing Reserve to Cater for Emergencies

Any business organization sets aside a certain amount of money to cater for unforeseen financial constraints and crisis such as bankruptcy. It is important that all businesses have this type of fund. Headliners can, therefore, utilize the funds that it has set aside for emergencies when faced with a crisis. This would help it improve its variances in sales budget. This strategy is useful in certain harsh periods that cannot be avoided. It ensures that in the event of such unforeseeable problems occurring, the organization will not need to seek additional funding and will rely on it reserve to normalize the situation. Headliners can use its reserve, but it would need to increase its budget for the next few months. This approach is devoid of both merits and demerits because the funds used are drawn from the reserve set aside for emergencies.

Managing Resources

Production Resources: This represents the materials used by an organization for its daily operations. For instance, Headliners production resources are shampoos, oil, and hair lotions among others. These materials are sometimes expensive despite their being few consumers. In consequent, the expenditure on products for Headliners would be higher than its budget. Therefore, reducing the amount of product would help remedy the situation. The organization needs to evaluate the most used products and concentrate in buying them, other than purchasing huge quantities of non-moving products.

Human Resources: When an organization is not doing well financially, it is always wise to reduce its manpower as this will lower costs. By so doing, it will be able to reduce its expenditure and the money recovered can be used to cater for other important tasks such as offsetting bank overdrafts or loans. However, Headliners cannot cut its human resource as it does not have many employees due to its small size. In my opinion, decreasing production resources would be the best suited approach for Headliners.

Inventory Resources: These are the equipment owned by a business to help facilitate its daily operations. For instance, the inventory resources for Headliners are hairdryers, shavers, and other machinery. Some inventory resources may be rendered obsolete due to change in fashion or any other factor. Therefore, for an organization to keep phase with its competitors it would be best if it disposes them off (although this would mean selling them at a cheaper price than the buying one) and buy new ones. In this way, the organization would benefit since the money generated from the obsolete inventory resources would now be used to purchase new ones. Headliners would, therefore, be able to keep updated inventory resources without having to finance the project from scratch.

There are many available options that Headliners can best utilize to redeem its financial position. However, all of them have their strengths and limitations and could in turn affect its working budget. All what it is needed is for the organization to go through all then available options and pick the most suitable. It also needs to assess the cause of the financial problem and their current budget so as to decide which approach they can use. It also needs to make it decision based on the understanding its current financial deficit as this would help it decide, which of the above approaches would be able to raise the needed amount of money. Lastly, after settling on the best method, Headliners then needs to make proper use of the raised income.

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