09 -- Working Capital Policy and Management

09 -- Working Capital Policy and Management - CPA BEC -...

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CPA BEC - STUDY UNIT 8 Working Capital Policy and Management: Core Concepts A. Financial Management 1. The objective of the firm is to maximize the shareholders’ wealth in the long term. The market price is the result of the firm’s investment and financing decisions. a. Management must make investment decisions , i.e., obtain a proper mix of productive assets. It must then obtain financing of these assets. These decisions are not independent. b. The amount and composition of assets are directly related to the amount and composition of financing. Given current and expected industry and overall economic conditions, the resulting mix of assets, liabilities, and capital determines business risk . c. Taxes are frequently 25% to 50% of all costs. Thus, tax planning is important in investment and financing decisions. 2. Working capital finance concerns the optimal level, mix, and use of current assets and the means used to acquire them, notably current liabilities. The objective is to minimize the cost of liquidity while guarding against technical insolvency. a. A conservative policy seeks to minimize liquidity risk by increasing working capital. The result is that it forgoes the potentially higher returns available from using the additional working capital to acquire long-term assets. b. An aggressive policy reduces the current ratio (and liquidity) and accepts a higher risk of short-term cash flow problems. B. Cash Management 1. The cash budget details projected receipts and disbursements, preferably for planning inflows and outflows.
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This note was uploaded on 08/29/2010 for the course CBEAM BEC taught by Professor Gleim during the Spring '10 term at De La Salle Lipa.

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09 -- Working Capital Policy and Management - CPA BEC -...

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