wcm - CHAPTER 21 WORKING CAPITAL MANAGEMENT: AN...

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CHAPTER 21 WORKING CAPITAL MANAGEMENT: AN INTRODUCTION
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Chapter 21 Working Capital Management: An Introduction 2 CONTENTS Introduction Meaning of Working Capital Scope of Working Capital Management Working Capital Needs of Different Types of Businesses Relationship of Working Capital Management to Business Solvency Operating Cycle and its Relevance for Working Capital Management Managing Working Capital Estimation of Working Capital Requirements
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Chapter 21 Working Capital Management: An Introduction 3 INTRODUCTION ± Traditionally, working capital has been defined as the firm’s investment in current assets. ± Working capital decisions are of tremendous importance for any firm. ± Such decisions affect the business’s liquidity position. ± Long-term financial decisions have cash flow implications for a period that may extend up to 20 years, or even more.
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Chapter 21 Working Capital Management: An Introduction 4 INTRODUCTION ± Short-term financial decisions, i.e., working capital decisions typically affect the cash flows of the firm for a shorter time frame, extending up to a maximum of one year, normally. ± The concepts of risk and time value of money are less pertinent to working capital decision-making
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Chapter 21 Working Capital Management: An Introduction 5 INTRODUCTION ± Operating cycle and its management assumes significance in the context of working capital management ± Working capital decisions are more flexible than long-term decisions.
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Chapter 21 Working Capital Management: An Introduction 6 MEANING OF WORKING CAPITAL ± Working capital is subject to multiple connotations. ± From the accountants’ perspective working capital refers to the current assets–current liabilities differential. ± From production managers ’ view it refers to the total funds that a firm needs to carry out its day-to-day operations. ± From the finance managers ’ angle it implies the total investment made in current assets.
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Chapter 21 Working Capital Management: An Introduction 7 MEANING OF WORKING CAPITAL ± Working capital, alternatively referred to as current or circulating capital, is the investment made by firms in their current assets. ± Current assets comprise all assets that the firm expects to convert into cash within the year, including –cash, – marketable securities, – accounts receivable, and –inventor
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Chapter 21 Working Capital Management: An Introduction 8 GROSS WORKING CAPITAL (GWC) ± Gross working capital (GWC) refers to the total investment made by a firm in current assets. ± It is termed as managers’ concept of working capital. ± It denotes the liquidity position of the firm.
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wcm - CHAPTER 21 WORKING CAPITAL MANAGEMENT: AN...

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