Working[wcm] - Working Capital Management Characteristics of Current Assets Current x Short x Swift life span transformation Trade Debtors

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Working Capital Management
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Characteristics of Characteristics of Current Assets Current Assets Short life span Swift transformation
Background image of page 2
Current Assets Inventories Trade Debtors Loans and Advances Investments Cash and Bank Balances Raw materials and components Work in progress Finished goods
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Current Liabilities Sundry Creditors Trade Advances Borrowings Provisions Commercial Banks Others
Background image of page 4
Working Capital Concepts Working Capital Concepts Gross working capital The firm’s investment in current assets Net working capital Current assets - current liabilities Working capital management The administration of the firm’s current assets and the financing needed to support current assets
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Significance of Working Significance of Working Capital Management Capital Management In a firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment (ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. Affects the company’s risk, return, and share price.
Background image of page 6
Operating and Cash Cycles Illustrated Operating and Cash Cycles Illustrated Receivables Conversion Period Cash received Finished Goods Inventory sold Inventory period Operating cycle Time Inventory purchased
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Operating and Cash Cycles Illustrated Operating and Cash Cycles Illustrated Receivables Conversion Period Cash received Inventory sold Inventory period Accounts payable period Cash paid for inventory Operating cycle Time Inventory purchased Cash cycle Payables Conversion Period
Background image of page 8
Short-term financial policy: the optimal investment in current assets Dollars Amount of current assets (CA) Total cost of holding current assets Carrying costs Shortage costs Minimum point CA* The optimal amount of current assets. This point minimizes costs.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
In an ideal world, net working capital is always zero be- cause short-term assets are financed by short-term debt Dollars Time Fixed assets = Long- term debt plus common stock Current assets = Short-term debt Fixed assets 0 1 2 3 4 Net Working Capital Policy: the optimal mix of current asset financing Permanent Current Assets = Short-term debt
Background image of page 10
short-term cash surplus and a large investment in cash and marketable securities Conservative Policy Dollars Time Long-term financing Total asset requirement Fixed assets Marketable securities
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Risks vs. Costs Trade-Off Risks vs. Costs Trade-Off (Conservative Approach) (Conservative Approach) Financing Benefits Less worry in refinancing short-term obligations Less uncertainty regarding future interest costs Financing Risks Borrowing more than what is necessary Borrowing at a higher overall cost (usually) Result Manager accepts less expected profits in exchange for taking less risk.
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/20/2010 for the course MBA 101 taught by Professor Dka during the Spring '10 term at Jaypee University IT.

Page1 / 40

Working[wcm] - Working Capital Management Characteristics of Current Assets Current x Short x Swift life span transformation Trade Debtors

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online