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WORKING CAPITAL
MANAGEMENT
INTRODUCTION
• Working capital management is also one of the
important parts of the financial management.
• Short-term, or current assets and liabilities are
collectively known as working capital.
• It is also known as short-term finance, current capital or
circulating capital.
• The most important difference between short-term and
long-term finance is in the timing of cash flows.
Cont…
• Working capital, sometimes called gross working
capital, simply refers to current assets used in
operations.
• Net working capital is defined as current assets
minus current liabilities.
– This is one measure of the extent to which the firm is
protected from liquidity problems.
• Net operating working capital is defined as current
assets minus none interest- bearing current liabilities.
SIGNIFICANCE OF WORKING CAPITAL
• Under this approach current assets are maintained just to meet the
current liabilities and operating expenses without keeping any cushion for
the variations in working capital needs.
• It is associated with maintaining lower levels of inventory, receivables and
cash for a given level of activity or sales.
• The permanent working capital in this strategy is financed by long-term
sources of capital, and seasonal variations are met through short-term
borrowings
• The strategy is characterized by lower liquidity, higher risk and higher
return.
C. Moderate Working Capital Strategy
• In this strategy, more liquid current assets that shown on the balance
sheet for a short time would be financed with short term financing.
• Permanent current assets and long term fixed assets that are going to be
on the balance sheet for a long time should be financed from long term
debt and equity sources.
The accounts receivable period: the time it takes to collect on the sale.
Cont…
Also, from the most recent income statement, we might have the following figures (in thousands):
Net credit sales ……$11,500
Cost of goods sold…. 8,200
End of
chapter Three !!!