Introduction to Working Capital Management

Major elements of working capital are

1) Cash 2) Marketable securities 3) Accounts receivable 4) Inventories 5) Current liabilities

Not overinvest in net working capital (assets) which provide low returns or increase costs

1) Excess idle cash—which has a low rate of return, if any 2) Excess accounts receivable—which do not earn interest 3) Excess inventory—which both incurs storage costs and risks becoming obsolete

Management of Net Working Capital provides

Another illustration of the trade-off between risk and reward in financial management

Current Assets definition

Cash and other resources expected to be converted to cash, sold, or consumed within one year

Current liabilities

Obligations due to be settled within one year

Working Capital (also called Net Working Capital):

The difference between a firm's current assets and its current liabilities.

The main concern of working capital is

To manage capital not the accounting

Over-investment in net working capital reduces the

rewards, which could be recognized by the firm through investment in assets with greater returns.

Current assets and current liabilities are considered

short-term balance sheet elements

Meet ongoing operating and financial needs of the firm, for example:

1) Inventory—To meet production requirements 2) Cash—To meet obligations as they come due.

The objective in managing working capital is to maintain adequate working capital in order to:

1) Meet ongoing operating and financial needs of the firm 2) Not overinvest in net working capital (assets) which provide low returns or increase costs

Working Capital (also called Net Working Capital) formula

Current assets − Current liabilities

Sufficient net working capital must be maintained to avoid the risk of

interrupting operations and the ability to meet current obligations

In a lockbox arrangement, customer payments are

not handled by the firm