FM UNIT 3 Working Capital Management ( Summary) Working Capital is about managing current asset and current liabilities to maximize

shareholders wealth The type of Funding: equity or debt/ short term or long term/ internal or external The kind of Funding Policy : aggressive ; moderate; flexible ( conservative) Efficiency and Effective of managing working capital is reflected in performance of: Cash cycle Operation cycle Financial ratio analysis : o stock ( raw material ) o stock ( work in process) or production process, o stock (finished product) o trade debtors o trade creditors Main concern: Balancing profitabilty and liquidity Matching policy with actual funding and operations practice Operation issues Issues Objectives Considerations 1. Inventories: optimize store holding cost Balance EOQ against realities 2. Cash: a)meet daily liabilities needs a)too little or too much cash b)providing for bad debt risk b)Baumols model or c)investment opportunities managers experience 3. Debt: policy to optimize debt a) assessing credit worthiness against risk b) setting discount policy c) use factoring solution Symptom of improper management: Overtrading and Overcapitalization Supporting activities: Implement budgetary system in particular cash flow forecast and cash budget. Apply appropriate investment appraisal to optimize values Opting for matching sources to fund working capital