Professional Documents
Culture Documents
OUTLINE
Characteristics of Current Assets
Factors Influencing Working Capital Requirements
Level of Current Assets
Current Assets Financing Policy
Profit Criterion for Current Assets
Operating Cycle Analysis
Cash Requirement for Working Capital
-
Accounts
receivable
Work-inprocess
Wages, salaries,
factory overheads
Raw materials
Cash
-
Suppliers
CAPITAL
Liquidity
Inventories
Debtors
Flexible
(Conservative)
Policy
High
Large
High
Restrictive
(Aggressive)
Policy
Low
Small
Low
CAPITAL REQUIREMENTS
AND THEIR FINANCING
Fluctuating current
asset requirement
Capital
requirements
A
B
C
Permanent current
asset-requirement
Fixed asset
requirement
Time
-
Stock arrives
Goods sold
Inventory period
Cash received
Accounts
receivable period
Accounts
payable period
Firm receives
invoice
Average inventory
Inventory period =
Average COGS / 365
Average accounts receivable
Accounts receivable period =
Annual sales / 365
Average accounts payable
Average payable period =
Average COGS / 365
-
ILLUSTRATION
Financial Information for Horizon Limited
Balance Sheet Data
Profit and Loss
Account Data
Beginning of
20X0
End of
20X0
102
Sales
800
Inventory
96
Cost of goods
720
Accounts receivable
86
90
Accounts payable
56
60
Sold
(96 + 102) / 2
Inventory period =
= 50.1 days
720 / 365
(86 + 90) / 2
Accounts receivable period =
= 40.2 days
800 / 365
(56 + 60) / 2
= 29.4 days
720 / 365
Operating cycle
50.1
+
40.2
= 90.3 days
Inventory
Accounts
period
receivable
period
Cash cycle
90.3
29.4
= 60.9 days
Operating
Accounts
cycle
payable period
-
SUMMING UP
Current assets have a short life span and are swiftly
transformed into other asset forms.
The working capital needs of a firm are influenced by
numerous factors : nature of business, seasonality of
operations, production policy, market conditions, and
supply conditions.
Determining the optimal level of current assets involves
a tradeoff between carrying costs and shortage costs.
According to the matching principle, the maturity of the
sources of finance should match the maturity of assets
being financed.
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