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chap12-ManagingWorkingCapital

chap12-ManagingWorkingCapital - Management Of Management Of...

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Management Of Working Capital
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working capital requirement, WCR = stocks + debtors – creditors – accruals/(prepayments) the difference between working capital (WC) and working capital requirement (WCR) is cash less short-term financial debt (bank overdraft) WC = WCR - short-term debt + cash Working Capital And Working Capital Requirement
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the operating cycle relates to working capital (WC), the net of current assets less current liabilities the operating cycle is the period of time, which elapses between the point at which cash begins to be expended on the production of a product, and the collection of cash from the customer The Operating Cycle (1)
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The Operating Cycle (2)
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Flatco plc Balance Sheet As At 31 December 2005
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plc Profit And Loss Account For Flatco plc Profit And Loss Account For The Year Ended 31 December 2005
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the working capital requirement is normally financed by bank overdraft because of its flexibility in accommodating the fluctuating nature of net current assets the general lower cost of short-term financing the working capital policy adopted depends on individual company objectives and there is inevitably a conflict between the goals of profitability and liquidity Working Capital Policy (1)
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aggressive policies may involve holding low levels of cash and stocks, with the risk of potential cash shortages and stock-outs conservative policies may be more flexible with higher levels of cash and stock, giving lower risk at the expense of reduced profitability Working Capital Policy (2)
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Effective
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