Class 1 – September 4th

Lesson 1: Banks lend money to people that don’t need it

1) Net Working Capital;

Current Assets – Inventory – Current Liabilities
We take out inventory because it is the least liquid. Also this will all depend on the health of the
company

Liquidity
Current assets that we can sell quickly but at same time, at full value

Role of NWC and How much is enough?

Optimal Level = 0

2:1 = most companies

4-6:1 = Retail/Volatile businesses
1:1 = Utilities

As little as possible. Because we want our current assets to equal our current liabilities. The
reason for that, is that Working Capital is non-productive. The company can invest the money
somewhere else

2) Matching Principal
Accrual: legal concept obligation to record and book certain entries on the ledger even if the cash is
not received/paid. Does not represent an economic reality which makes it irrelevant for short-term
financial management. This is why we use cash statements.