Working Capital Management

Working capital management is one of the business strategies that intend to ensure a
company’s operations are effective through monitoring and taking advantage of some of the
current assets and liabilities effectively and efficiently. The level of effectiveness of working
capital management can be quantified using the ratio analysis. A key focus is to balance the
working capital and liabilities, commonly referred to as debts. Therefore, it can be used as a
metric to determine the efficiency level in their operations and the stability on a short-term basis.
Hence, the working capital ratio can be obtained by dividing the current assets by the liabilities
for a specific duration, especially within a single financial year. It will be possible to determine if
the organization has an adequate flow of cash to cover all the short-term debts and some of its
expenses to attain the set goals and objectives in the future.
In the case scenario, there are three financial options. The first one is for the MDM Bank
option, where the amount of debt is equivalent to $3,200 and an equity dilution of 0% at an
interest rate of 8%. In the second option, Flores debt plus free equity option has liability worth
$4,700 with an equity dilution of 20% at a similar interest rate of 8%. The last option is A&T,
where the amount of debt is equivalent to $3,700, equity dilution of 10%, and a similar interest
rate. The main goal of the working capital is to evaluate the three options to identify the option
that will be effective and efficient.

Decision Table
Available Options Decision Made
1 MDM Bank Option Select
2 Flores Debt Plus Free
Equity Option

Reject

3

3 A&T Reject
The decision option table appears that the most effective decision to consider is the MBM
bank option. The second and third alternatives will be rejected. The main reason for making the
decision is based on the dilution rate. For instance, there is a dilution rate of 0% in the equity in
the first option for the MDM bank option. The situation is different for Flores, with a dilution
rate of 20%, and A&T, with a dilution value of 10%. In addition, the interest rate is the other
contributing factor. In most instances, the interest rate will determine the option of the investors
and their potential to make the necessary contributions. 8% is an interest rate compared to 10%,
which is available in the other options.
The reason for rejecting the Flores debt plus free equity option is the long-term
implications. The interest rate is offering a lucrative line of credit at 10%. However, the situation
will not be favorable in the long run because the equity dilution of 20% will affect the enterprise
value. The same situation is evident and applicable in the A&T option since the line of credit
appears to be lucrative with an interest rate of 8%. For the investors who are focusing on the
working capital, they will be able to be lured to the alternative because it is a suitable option in
the short run. However, there is an equity dilution of 20%, which will lead to a reduction in the
value, not making it the most favorable alternative to consider in the situation. In general, the
primary consideration is the value created at the end, and less attention is placed on the
anticipated yield.