Professional Documents
Culture Documents
Overview of
Working Capital
Management
8-1
8-2
Overview of Working
Capital Management
Working
Capital Concepts
Working
Capital Issues
Financing
Current Assets:
Short-Term and Long-Term Mix
Combining
Liability Structure
and Current Asset Decisions
8-3
Significance of Working
Capital Management
8-5
8-6
Policy A
Assumptions
50,000 maximum
units of production
Continuous
production
Three different
policies for current
asset levels are
possible
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Impact on Liquidity
Optimal Amount (Level) of Current Assets
Policy A
Liquidity Analysis
Policy
Liquidity
A
High
B
Average
C
Low
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Impact on
Expected Profitability
Optimal Amount (Level) of Current Assets
Return on Investment =
Policy A
Net Profit
Total Assets
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Impact on
Expected Profitability
Optimal Amount (Level) of Current Assets
Policy A
Profitability Analysis
Policy
Profitability
A
Low
B
Average
C
High
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Impact on Risk
Optimal Amount (Level) of Current Assets
8-10
Decreasing cash
reduces the firms ability
to meet its financial
obligations. More risk!
Stricter credit policies
reduce receivables and
possibly lose sales and
customers. More risk!
Lower inventory levels
increase stockouts and
lost sales. More risk!
Policy A
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Impact on Risk
Optimal Amount (Level) of Current Assets
Policy A
Risk Analysis
Policy
Risk
A
Low
B
Average
C
High
Policy B
Policy C
Current Assets
25,000
OUTPUT (units)
50,000
Liquidity
High
Average
Low
Profitability
Low
Average
High
Risk
Low
Average
High
Classifications of
Working Capital
Components
8-13
Permanent
Temporary
Permanent
Working Capital
DOLLAR AMOUNT
TIME
8-14
Temporary
Working Capital
DOLLAR AMOUNT
TIME
8-15
8-16
DOLLAR AMOUNT
Short-term financing**
Current assets*
Long-term financing
Fixed assets
TIME
8-17
DOLLAR AMOUNT
Short-term financing**
Current assets*
Long-term financing
Fixed assets
TIME
8-18
8-19
Seasonal needs are financed with shortterm loans (under normal operations
sufficient cash flow is expected to cover the
short-term financing cost).
Self-Liquidating Nature
of Short-Term Loans
8-20
Result
8-21
DOLLAR AMOUNT
Short-term financing
Current assets
Long-term financing
Fixed assets
TIME
8-22
Comparison with an
Aggressive Approach
Result
8-23
DOLLAR AMOUNT
Short-term financing
Current assets
Long-term financing
Fixed assets
TIME
8-24
SHORT-TERM
LONG-TERM
SHORT-TERM
(Temporary)
Temporary
Moderate
Risk-Profitability
Low
Risk-Profitability
LONG-TERM
(Permanent)
Permanent
8-25
High
Risk-Profitability
Moderate
Risk-Profitability
8-26