Working capital management, the best way to release tied-up capital

Working capital management is an attempt made by accountants and business owners to strike a balance between profitability and liquidity.


Many people (especially small business owners) either forget or are not aware of the fact that bad-debt has ‘double cost’ – the cost of writing them off and the cost of servicing associated to bad debts until it is been written off.


A lot of fund that would have been put to productive use have been tied up in working capital without being aware of it. Working capitals are those resources at the disposal of a business that are liquid. This is the function of; Receivables, Inventories and Payables.


The Approach I will follow in this article is to x-ray these components of working capital while bringing out the hidden treasure in them (which is the aim of this article).



Trade receivables or trade debtors are liquid asset that is in form of promissory note. A customer buys goods and promise to pay in the future.


Good receivable management has four key stages VIZ:

  • Policy formulation stage. At this stage, a framework that will guide credit involvement of the business is drawn. Elements of the framework to be considered include; establishing the terms of trade such as the period of credit offered and early settlement discount to be given, whether to charge interest on overdue amount, credit access procedures, action to be taken in the case of defiance etc. in fact, this is the agreement stage if you permit me to use that word.
  • Credit worthiness assessment stage. Information relating to intending credit customer is analysed here. Information could be sourced from banks, or other credit rating agencies. The greater the amount to be granted as credit, the greater the need for proper reference from the right authority.
  • Credit control stage. Receivables record must be monitored continually. This primarily is the responsibility of sales ledger administration department. Smaller businesses are however not advised to have a separate department for this function. Companies can use anything to class customers. My company use ‘star’ (star1, star2,…star5) Star5 being the category of customers with the most privilege. People in this class are given the longest credit term. Note however that this is frequently reviewed so that customers can be re-classed according to their prevailing circumstances. A customer’s payment record and account receivable aging analysis is examined on a recurring basis.
  • Collection and action stage. This is the second most important stage after the policy formulation stage. A proper collection system should be used. A system that will not allow customers to play prangs on the company. Also, systematic steps should be followed to recover overdue amounts. The use of reminder, visits, phone calls, refusal to grant further credit, use of a specialist debt collecting agency or legal action- as a last resort. However the company chooses to go about this, the cost-benefit concept should always be borne in mind. I.e. the administrative costs and other costs incurred in debt collection should not exceed the benefits from incurring those costs. The financial and non-financial effects of contracting a factor should also be evaluated.


The over all aim of receivable management is to reduce the receivable days. What this will do for the business is that it will release funds for further production, save the finance cost that would have otherwise been paid to banks and allow the company to take advantage of early settlement discount from its suppliers.



Inventories comprise of both; raw materials, WIP (work-in-progress) and finished goods. Depending on the company’s circumstance, inventory management techniques like JIT (just-in-time) and EOQ (economic order quantity) can be used. JIT for instance is an inventory management philosophy that advocates zero and defect-less inventory at all time.


This technique has some useful potential that can be used to release a sum of money but is not appropriate to all sectors. An example is the hospital. A stock-out that is a major drawback of JIT could prove disastrous in hospitals.


EOQ has some of its own drawback hinged on the assumptions upon which it is based. The aim of this exercise is to reduce inventory days (i.e. to reduce the number of days that cash is being tied down in stock). Again, this will release the cash for other productive uses. If you have to keep inventory, the best way to manage and track stock is by using a vertical storage carousel.



Unlike the other components of working capital management, the aim of payables management is to increase the payables days. The primary legal and ethical means of doing this is to re-negotiate with your suppliers. This however, should be done with caution so as not to be enlisted in the black list of different suppliers.


In conclusion, proper working capital management is a goldmine that any business can easily tap into to release quantum cash. Working capital management is of three kinds, Aggressive, Conservative and Moderate (Modest) method. The one to choose is dependent on the circumstances of the business and the appetite of the company towards risk.

Eight simple steps to prevent credit card identity theft

Credit card identity theft is rising at an appalling rate and it is a significant problem across the country. Criminals can perform identity theft quite easily due to lenient credit industry norms, careless data management in the offices and the simplicity of getting Social Security Numbers. Most recently, a number of credit card processing companies have been noticed to commit identity theft. FIA Credit Services is one such company that has been in the news headlines for quite some time. 

If you become a victim of credit card identity theft, checking your credit report at regular intervals would help you detect it soon. However, you can prevent credit card identity theft by following some simple steps.

Eight steps to avoid credit card identity theft  


Step 1: Carry less number of credit cards


Cut down the number of credit cards you have in your wallet. Only carry one or two credit cards with you. If possible, carry an ATM or debit card. Use them carefully and make the most of the online accessibility to your bank account to keep tabs on account activity on a regular basis. If you detect any sign of fraud, inform this to the bank instantly.


Step 2: Be watchful


While using your credit card at a restaurant or a shopping mall, keep a close watch on how your card is swiped by the clerk or waiter. Unscrupulous employees have been identified to use portable gadgets known as skimmers to swipe the credit card fast and download the account number details onto a PC afterwards. The miscreant utilizes the account details for Internet shopping or generating fake credit cards.

Step 3: Write down all the card details


Maintain a list or xerox copies of all your credit cards. Write down the expiry dates, account numbers and phone numbers of fraud departments and customer services. Keep all the details in a safe place (not in your purse or wallet) so that you can promptly get in touch with the credit card company if your cards are stolen or your card accounts are being utilized illegally.

Step 4: Only provide your details to a reliable company


Don’t provide your credit card number, Social Security Number or any other personal details on the telephone, through e-mail or over the Internet if you don’t have a reliable business association with the company.

Step 5: Always carry the credit card receipts with you


Carry your credit card receipts with you all the time. Don’t throw them into a public trash bin. While shopping, keep receipts in your wallet and not in the shopping bag.

Step 6: Avoid writing your card number on your checks


Don’t allow your credit card number to be mentioned on your checks. It is a breach of California Law (Civil code section 1725) and statutes in a number of other states and exposes you to fraud.

Step 7: Check mail


See the mail if you hope to receive a reissued or new credit card. Talk to the issuer if the card does not reach you.

Step 8: Check your credit report


Request your credit report once every year as a minimum. If you have fallen prey to identity theft, your credit report would reflect discrepancies like inquiries not made by you or credit accounts not opened by you. The sooner you identify fraud, the faster you can rectify your credit report and get back on track.

Working capital funding for IT investment- key factors to be considered when formulating it

The objective of working capital management is to strike a balance between profitability and liquidity. Many high-tech firms that rely almost solely on IT infrastructures often find it difficult to make economically sound decisions when it comes to working capital funding for IT investment

IMG_20160807_191147In order to understand working capital requirement for IT infrastructures, an attempt will be made to divide assets into three types VIZ;

  • Non-current assets. These are long-term assets from which an organization expects to derive economic benefit from over a number of periods. For example, servers and other forms of database equipment.
  • Permanent current assets. These are the amounts required to meet long term minimum needs and sustain normal trading or servicing function of the company. For example, the average bandwidth or storage device to be maintained at all time.
  • Fluctuating current assets. These class of assets are those current assets which varies according to normal business activities. For example, due to seasonal variation, the computing power required to meet the demands of customers in a particular period of the year might either increase or decrease.

Fluctuating and Current assets together with permanent current assets form part of the working capital of an IT company, which may be financed by either long-term funding (including equity capital) or by current liabilities (short-term funding).

Approaches to working capital funding

There are basically three approaches to working capital funding VIZ;

  • Aggressive Approach. This method encourages managers to finance all fluctuating assets and part of permanent assets with short-term funds. This is a more risky but more profitable approach to working capital management.
  • Moderate Approach. As the name implies, fund are used according to the nature of the asset(s) being financed. A common practice is to finance all non-current assets with long-term funds, all fluctuating assets with short-term funds and to split permanent asset in such a way that long and short term funds will finance the assets equally.
  • Conservative Approach. This is a method that finances all non-current assets and permanent assets as well as part of the fluctuating current assets by long-term funds. This is a less risky approach. The down side of it is that it is equally less profitable.

Depending on the attitude of the company towards risk, the nature of the asset is supposed to go a long way in determining the method of funding that is required. Many of the failures experienced among the dot com companies in the past decade or so is largely due to the fact that these companies violates the matching principle, which suggest that long-term finance should be used for long-term assets or projects and vice versa without taking some risk benefit factors into consideration. Working capital management is arguably the best way to achieve a balance between risk and returns.

Factors to consider

For simplicity, the factors to be considered while making working capital funding decision will be listed in bulleted format below

  • The nature of the assets in question
  • The management’s attitude towards risk, return and safety
  • The company’s industry norm (those in sectors that require longer time to deliver result will obviously require more funding
  • Availability of cash
  • The previous working capital funding tradition of the company (experience plays significant role here)
  • Technological trend
  • Demand trend of the company’s service

My experience in the field of It and finance has made me conclude that tending towards what I call ‘the adjusted moderate approach’ will be the best policy to adopt. The reason for my opinion is the fact that the IT industry as a whole needs an average of eighteen (18) months only for changes that is capable of rendering so many assets obsolete to come.

Adjusted moderate approach is a tweak between moderate approach and aggressive approach. This is a method of financing fluctuating current assets purely by short-term loan (bank over-draft preferably) and outsourcing the provision of permanent current assets.

This is because the so-called permanent assets are not really permanent and it will not be wise to put in money in them as they are bound to change soon.

Applying adjusted moderate approach to working capital will help every IT company maximize returns from investments in IT infrastructures.


Ten sure signs of overtrading in small businesses and their possible solution


Small businesses by nature are more volatile. Their owners tend to try out so many ways of doing things within a short period of time. This in most cases land them in the trap of overtrading. Overtrading in common parlance simply means trying to achieve too many with too little. Small business owners usually allow their ambition and emotion to supercede the reality. The failures of small businesses are largely linked to the negative and ugly effect of overtrading.

Small business owners can shield themselves and their businesses from overtrading by being on the lookout for signs of overtrading and corrective actions taken. In this article are TEN signs of overtrading and also possible ways to eliminate their effects.


  1. Rapid growth in fixed assets. In this age of constant technological breakthrough, small business owners acquire sophisticated assets (especially IT related) on a daily basis. This is often without a corresponding growth in investment opportunity that the asset can be employed to generate adequate returns.
  2. Drastic increase in sales. Growth in sales is a normal thing. In fact, that is the essence of business but, when it becomes so drastic; its benefit will be lost. Growth in sales is like a two-edged sword- too low bad; too high bad. Many small business owners equate business success with rapid growth in sales (this is arguable anyway).  And they achieve this by employing more sales staff than needed.
  3. Rapid increase in receivables. Small businesses usually employ so many incentives to increase sales and one of such incentives is to allow unnecessary long credit days. This usually place undue pressure on the need for additional working capital without additional benefit to the business.
  4. Over reliance on short term debt (usually in the form of overdraft facility). Because of the principle of equity gap (a situation where a business has little owner fund and is not in a position to raise capital from the stock exchange such as The Nigerian Stock Exchange), many small business owners tend to resort to bank loan. There is nothing bad with this approach if well managed and monitored. Problems only come when too much reliance is placed on it.
  5. Sudden jump in inventory. Sudden growth in piled stock is a warning sign that overtrading is around the comer. May be in the bid to meet the surge in demand due to aggressive advertising, a company may pile up stock just to avoid the effects of stock-out which is another area to avoid in business
  6. Rapid decrease in cash balances and its equivalent. Companies quickly go bankrupt once it cannot meet its short-term obligations over a protracted period of time. A profitable business can still go bankrupt if it does not have a healthy cash flow.
  7. Stagnancy in owner(s) equity. Owner’s equity is that portion of capital of a business that is permanent is the business for use. Significant disproportionate growth with debt finance is a danger sign that overtrading is creeping in.
  8. Little or no growth in reserve. Reserves by nature are supposed to be growing. It is a warning sign that there is danger as soon as it stops growing.
  9. Unusual increase in trade payables. In as much as I personally encourage small businesses to tap into the potentials of trade credit, problems come knocking when its use goes out of proportion. The business will loose its reputation and eventually go bankrupt if it is known to heavily rely on trade credit that gives rise to trade payables.
  10. Irrational emphasis on advertising. Small businesses start inviting overtrading as soon as they start competing with multinationals on the amount they spend on advertising and sales promotion.


The mere identification of these signs is a vital step in eliminating overtrading and its effect. More specific countermeasures are listed below

  1. Improved receivables and inventories control. Small business managers should keep an eagle eye on these variables so that they don’t go out of proportion. Good working capital management is a must in this regard.
  2. Increase owner’s equity. Small businesses should increase equity investment. As tough as this may be, small business owners should not see it as impossible. After all, that is part of the entrepreneurial spirit. You can consider using Business Angels or Venture Capitalists to raise equity.
  3. Investment appraisal. Proper investment appraisal should be carried out before investing in fixed assets.
  4. Employment of good cash management technique. Cash budgeting and other cash management techniques like Baumol Model should be used to make a calculated guess on the company’s cash need and necessary arrangements made.


I hope you enjoyed the time you invested in reading this article.

Finance and information security professionals- emerging heroes in the new age.

 Finance is the life blood of every economy. Some people will tell you that ‘money rule the world’ while some will say ‘money makes the world go GAGA.’ Money management skill has never been this important in human history as it is today. A research carried out by an independent researcher shows that the demand for people with technical competence in the area of finance will increase by 30% in the coming year (2010)

As true as the above may be, information and information security experts are one set of people that has the power to put everything to a halt under a twinkle of an eye just by clicking a mouse.

Now, imagine the potentials an individual will have if he/she is able to combine these two wonderful technical skills. Am sure you will want to be among these few heroes that will rule this world in no distant time. If you are, then read on as this article will give you useful tips on how to become finance professional and IT professional.

A friend of mine will always tell me that ‘it all starts in the mind.’ This is to say that you have to be mentally ready as there is a lot challenge out there facing these set of people. The finance professionals are busy battling the ever complex and volatile world of finance while the IT guys are there struggling against the bad smart guys that want to steal peoples information at all cost especially financial information.

On this premise, it pre-supposes that for you to be a successful ‘hero’ in this our age, you must have an in-depth knowledge of both finance and IT

Note that I didn’t say certificate, but rather, knowledge.

Below are list of areas that have been forecasted to explode soonest

  • Asset Management
  • Fund Managers
  • Risk managers
  • Compliance Auditors (governance professionals inclusive)
  • Security Cloud Services –  e-mail security, web content filtering, authentication and network firewall monitoring
  • Date Security
  • In The healthcare sector, Electronic Medical Record systems operators
  • Secure software development and web application security – those with knowledge of C++, C, Java. And .NET
  • Those with knowledge of virtual: storage, servers, desktops and application security will hope to smile as there is a debate going on right now as regards the adequacy of traditional physical computing environment.

There are dozens of knowledge bank out there that you can tap from. Some of them are: ACCA (Association of Certified chartered Accountants), CIMA (Chartered Institute of Management Accountants), AICPA (American Institute of Certified Public Accountants), ISACA (Information Systems Audit and Control Association), ACFE (Association of Certified Fraud Examiners), CCNA (Cisco Certified Network Associate), MCSE (Microsoft Certified Systems Engineer) and ACEH (Association of Certified Ethical Hackers). Subscribe to their journals and get useful insight. If you can, get certified with one or two of them, but if you cannot, no problem, all you to do is get their materials and read them. If you read their materials, the only difference between you and a person certified will be the privilege/ preferential treatment given to the bearer of such certificate.

In this internet age, with a properly configured Laptop and internet connection, you may not even need those paper qualifications but your technical competence to consistently deliver high quality service over the net. You will be surprised at the amount of people waiting to grab the service that you are willing to offer- especially the IT services. Chances are that you want to climb the corporate ladder. If that is the path you choose to follow, then you have to get certified so as to be relevant. The SKILLS needed to pass these professional exams are not too difficult to grab. All you need is just the right MOTIVATION to become a professional accountant or an IT professional.

Information Technology Financial Risk- how to reduce it.

 Information technology on its own has no financial risk attached to it but if used wrongly can magnify the risk involved in finance. Take banks as an example. Prior to the time of the deployment of information technology infrastructure in banks, the level of financial losses directly linked to operational efficiency was relatively low compared to what it is now.

In those days, banks only worry about the risk associated with internal controls. But today, they also face external risk that is directly linked to the deployment of IT infrastructures. The in-house thieves are always on the look out to advantage of known vulnerabilities that exist in the banks IT while the external thieves are constantly looking for ways to break into the database of banks and other financial institutions.

Looking at all these, one may think that all hope is lost as the offensive guys are constantly modifying and perfecting their evil strategies to beat all countermeasures. In this article are loads of useful tips that financial institutions can use to manage their IT related financial risk.


  • Fortification of internal control. The most effective way to mitigate against internal financial risk is to have a strong internal control in place. A well implemented internal control is half the battle of risk associated to internal factors. Job rotation and mandatory vacation works as added tonic to the effectiveness of good internal control
  • Workers incentives. It is often said that your control is as good as the motive of those that implement it. You may have the best control in place, but without the presence of properly motivated and encouraged workers, the intended benefits of these controls will all hit the rock.
  • Education of staff. Educating your staff on the inherent risk of information technology gadgets goes a long way in reducing the stress associated with financial risk in information technology gadgets.


  • Use of tested, trusted and reliable IT solution providers. Companies should avoid going for ‘cheap articles’ that has no quality. Cheap articles cost more in the long-run. The extra monies that would be spent on fixing known vulnerabilities might exceed the initial extra cost that would have been made on the original equipment.
  • Use of “honey pots” and “honey nets”. These are terms used to describe attempts made by companies, especially banks and other financial institutions to lure hackers into firing their shots on a simulated corporate network. This works well for security purpose as it will help company’s security professionals analyse hackers new tricks from it. The only downside of this is that it may send the wrong signal to stakeholders (especially shareholders that will be thinking that their investments are no longer safe). They may not be well informed and will assume that the company’s real network is that porous.
  • Educating their customers on how to use their facilities- especially online users. Often time, customers tend to sue companies and claim huge amount of money in the form of compensation. Companies that make it part of their policy to educate all their customers on any new information technology gadget acquired always save a lot of money that would otherwise be spent in legal tussles. This education can be as simple as sending out newsletter to all their customers periodically.

The tips you get from this article and the ones you got from other information security related articles will help beef-up your IT security base. So fell free to read up other articles in the financial information security section of this site.