Factors affecting a firm’s efficiency

Factors affecting a firm’s efficiency

Today, every successful business has efficient management of its working capital. Working capital management plays a vital role in maintaining a company’s operational activities through efficient financial budgeting and utilization. It refers to management of cash-ins and cashouts in terms of differences of assets and liabilities in the daily operations of a firm. The profitability of a firm is ascertained when the available current assets surpass current liabilities. To realize such efforts, techniques of managing working capital are used frequently. These include; financial budgeting, inventory management, discounting and factoring of invoice and management of stock (YUSUF, 2019). They affect a firm’s efficiency differently, as discussed in detail below.

Budgeting of business finances helps reduce the chances of mishandling of funds in the day to day business operation. It ensures that available funds are allocated for different roles depending on the objectives of a company. Careful management of expenses ensures that suppliers are paid on time to maintain better relationships in terms of accessing deals with good terms. According to YUSUF (2019), efficient management of stock requires regular checking in of cash in and cash out. As a result, companies avoid long term investment of stock with less value to the company.

Inventory management helps companies dealing with manufactured commodities access goods at the right time with the expected quantity. Inventory usage helps business individuals calculate the worth of a commodity’s sale by counterchecking the overall profits achieved from the sale by deducting other expenses. Using appropriate finance sources while starting a business facilitates easy payment of debtors and a good working capital cycle.

Working capital management techniques ensure regular financing of business activities. It is important to ensure financial stability to accommodate daily operations and immediate settling of debts (Gupta, 2019). Therefore, maintaining a balanced working capital promotes the profitability, liquidity, and progressive prowess of a firm.

Evaluate alternative capital projects

Long term activities that often require a lump sum of money and societal benefits from developmental goals are often referred to as capital projects. Capital projects are one-time investments that result in a loss of liquidity due to its unrecurring nature. When initiating capital projects, all the starting capital invested are required to yield back positive return in the long run. The cashflows and cash inflows are calculated to achieve the optimum benefits accrued. It is a necessity to conduct a presurvey of the expected outcome before initiating any investment in the market. This includes identifying similar projects in the market and evaluating their net worth. As a result, one can easily determine the efficiency of the intended capital project in the long run (Korotkov, 2020).

The balance between tradeoffs expected risks and revenues is crucial to any financial management. Capital projects are categorized as highly risky projects due to the huge amounts of money used. According to Petras (2019), any investment projects that utilize much money with expected high returns have a likelihood of incurring significant risks tradeoffs. Therefore, a shift in the current technology or an amendment of law by the state often results in huge losses. When planning, it is essential to identify all the possible risks and mitigative measures to prevent unexpected comebacks.

Before alternative projects, time frame allocation expected budget, and the outcome is determined. Outcomes are long term benefits accrued from a project. For any project to be initiated, it must have many positive outcomes as compared to the negative ones. Budgets allocated for the project must be able to incur all the usual activities and shortages to ensure projects are successfully completed.

Timescales are critical to any project. Scheduling time frames and deadlines in all the project stages ensure that all the strategies and purposes are completed in time. Frequent monitoring and evaluation of projects ensure that project quality is achieved, and risks are identified at the early stages.

To sum up, capital projects are essential for the development of society. It is necessary to consider possible risks, allocate sufficient budgets, and timeframe for every activity to achieve positive feedback. Quality capital projects are often accompanied with high return rates. Therefore, planning and presurvey are vital in ensuring the success of alternative capital projects. One key example is infrastructural development.