WORKING CAPITAL (FINANCE)

short term financial management

is concerned with decisions regarding to current assets and currentl liabilities

positive working capital

is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

increase profitability

process of optimisation in working capital =

management of working capital

refers to management of CA as well as CL.

gross working capital

represents investment in current assets

conservative current asset policy aggressive current asset policy moderate level working capital policy

types of Working Capital Policy

working capital

typically means the available current or short-term assets of a firm such as cash, receivables, inventory and marketable securities that are used to finance its day-to-day operations.

conservative current asset policy.

under this working capital policy, the business has a substantial amount of cash, receivables, and inventories resulting in a minimal amount of resources invested in non-current assets.

Cash Management

will be successful only if cash collections are accelerated and cash payments (disbursements), as far as possible, are delayed.

gross working capital = current assets net working capital = current assets - current liabilities

working capital formula

current liability

A spontaneous debt is normally classified as a

Nature of the Industry Demand of Industry Cash requirements Nature of the Business Manufacturing time Volume of Sales Terms of Purchase and Sales Inventory Turnover Business Turnover Business Cycle Current Assets requirements Production Cycle

FACTORS DETERMINING WORKING CAPITAL

working capital deficit

If current assets are less than current liabilities, an entity has a working capital deficiency, also called a

aggressive approach conservative approach maturity approach

In financing the current assets or working capital, the business can adopt the following modes of financing:

aggressive current asset policy.

In this working capital policy, most of the resources of the business are tied up in non-current assets. Higher investment in non-current assets gives a higher return to the business, but the risk involved is likewise high.

Prompt payment from customers (Debtors) Quick conversion of payment into cash Decentralized collections Lock Box System (collecting centers at different locations)

Methods of ACCELERATING CASH INFLOWS

Paying on the last date Payment through Cheques and Drafts Adjusting Payroll Funds (Reducing frequency of payments) Centralization of Payments Inter-bank transfers Making use of Float (Difference between balance in Bank Pass Book and Bank Column of Cash Book)

Methods of DECELERATING CASH OUTFLOWS

t

Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales. ( t or f)

goal of working capital management

The .......... is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Money otherwise tied up in current assets can be invested in activities that generate higher payoff Reduces need for costly financing

The benefit of low working capital

reducing the capital employed improving efficiency in the areas of receivables, inventories, and payables

The fundamental principles of working capital management are r\

current asset policies

These ..... are considered as the investment policy of the business.

temporary current assets

They are the portion of current assets that fluctuates or varies in relation to the seasonal or cyclical movement of sales.

permanent current assets

They are the portion of the current assets that accumulates and remains fixed through the operating cycle (ex: level of inventories displayed in the shelves).

Temporary working capital

This is the amount of investment required to take care of fluctuations in business activity or needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.

Moderate Current Asset Policy

This moderate level of working capital policy suggests that at least 50% of the total resources is allocated to the current assets and the remaining balance to the non-current assets.

temporary current assets

This type of current asset is normally converted into cash within the normal operating cycle of the business.

permanent current assets

This type of current asset is not normally converted into cash within the normal operating cycle of the business.

aggressive current asset policy.

When a business adopts a low-level working capital policy based on some factors influencing its operations is said to have an

f, more

When planning the short or long-term funding requirements of a business, it is less important to forecast the likely cash requirements than to project profitability etc. (t or f)

Moderate Current Asset Policy

...is an approach adopted by a business when the expected level of current asset is not too high or too low. This policy balances the conservative and aggressive working capital policies.

non-spontaneous debt

A ...... can be classified as either a current or long-term liability.

conservative current asset policy.

A business that maintains a high level of working capital is considered to be adopting a

working capital

An increase in ....... indicates that the business has either increased current assets (that is received cash or other current assets) or has decreased current liabilities, for example, has paid off some short-term creditors.

f, reduce

As a consequence, you could increase the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. (t or f)

intensified competition

Businesses face ever-increasing pressure on costs and financing requirements as a result of ......... on globalized markets.

Risk of shortages in cash, inventory

Cost of low working capital

working capital management

Decisions relating to working capital and short term financing are referred to as

time and money

Each component of working capital (namely inventory, receivables and payables) has two dimensions ....... , when it comes to managing working capital.

Total permanent assets

It is the sum of permanent current assets and fixed assets.

Non-spontaneous debt

It refers to debt that arises not from ordinary business activities but from borrowings from bank loans.

spontaneous debt

It refers to short-term debt that arises from the normal course of business operation.

to run firm efficiently with as little money as possible involves trade-offs between easier operation and cost of carrying short term assets

Objective of Working Capital Management

financing approach

The second most important issue that must be clearly outlined in the working capital policy is the ...... to be adopted to support the current assets requirements.

t

You can get money to move faster around the cycle or reduce the amount of money tied up. Then, the business will generate more cash or it will need to borrow less money to fund working capital. (t or f)

Investment policy

addresses the allocation of resources of the business between current and non-current assets.

corporate executives

devote a considerable amount of attention to the management of working capital.

working capital managment

involves managing the relationship between a firm's short-term assets and its short-term liabilities.

Active working capital management

is an extremely effective way to increase enterprise value.

Optimising working capital

results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs, thereby increasing liquidity for strategic investment and debt reduction.

circulating capital

working capital are also referred to as