WORKING CAPITAL MANAGEMENT BBM 310.doc - 3 Investment...

3 Capital
Investment Decisions

WORKING CAPITAL MANAGEMENT
a) Working capital (also called gross working capital) refers to current assets.
b) Net working capital refers to current assets minus current liabilities.
c) Working capital management refers to the administration of current assets and current
liabilities.
 Target levels of each category of current assets
 How current assets will be financed
d) Liquidity management involves the planned acquisition and use of liquid resources over
time to meet cash obligations as they become due. The firm’s liquidity is measured by
liquidity ratio such as current ratio, quick (or acid test) ratio, cash ratio, etc.
FINANCING CURRENT ASSETS
Current Assets require financing by use of either current funds or long term funds. There are
three major approaches to financing current assets. These are:
a) Matching Approach
This approach is sometimes referred to as the hedging approach. Under this approach, the firm
adopts a financial plan which involves the matching of the expected life of assets with the
expected life of the source of funds raised to finance assets.
The firm, therefore, uses long term funds to finance permanent assets and short-term funds to
finance temporary assets.
Permanent assets refer to fixed assets and permanent current assets. This approach can be shown
by the following diagram.

b) Conservative Approach