Question

1. Why small firms need to manage working capital carefully? Explain it with an example.

2. What are different types of risk that a small business may encounter? How a business owner's policy can help owners to manage risk in the firm?

Answer 1

The primary objective of managing the working capital is to ensure that a small firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses.

The management of working capital involves many things from managing inventories, receivable, accounts and payable, and cash. Working capital management is maintaining a sufficient balance between a company's current assets and liabilities, An effective working capital management system will definitely boost the growth and earnings of the firm.

A few years back McDonald had a negative working capital which means the companies liabilities are more than the asset then the company recovered from that and registered positive working capital.

Different types of risk

1.financial risk - Lack or shortage of money

2. Strategy risk - Figuring out properly on what steps would lead to better results

3.Reputation risk - Maintaining the goodwill of the company

4. Liability risk - Liabilities becomes more

5.Security risk - Security in terms of data

Business owner policy will definitely help business by protecting all the major assets and property. The liability is also covered in one risk policy  This policy will help when the business is struck with some unexpected crisis.