session 11 wcm - LEARNING OBJECTIVES 1 Underline the need...

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LEARNING OBJECTIVES Underline the need for investing in current assets, and elaborate the concept of operating cycle Highlight the necessity of managing current assets and current liabilities Explain current asset investment and financing Focus on the proper mix of short-term and long-term financing for current assets 1
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Difference in the management of fixed assets and current assets First , in managing fixed assets, time is a very important factor; consequently, discounting and compounding techniques play a significant role in capital budgeting and a minor one in the management of current assets. Second , the large holding of current assets, reduces the overall profitability. Thus, a risk-return trade-off is involved in holding current assets. Third , levels of fixed as well as current assets depend upon expected sales, but it is only the current assets which can be adjusted with sales fluctuations in the short run. Thus, the firm has a greater degree of flexibility in managing current assets. 2
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Concepts of Working Capital Gross working capital (GWC) GWC refers to the firm’s total investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory). 3
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Concepts of Working Capital Net working capital (NWC) NWC refers to the difference between current assets and current liabilities. Current liabilities (CL) are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. NWC can be positive or negative. Positive NWC = CA > CL Negative NWC = CA < CL 4
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Concepts of Working Capital GWC focuses on Optimisation of investment in current Financing of current assets NWC focuses on Liquidity position of the firm Judicious mix of short-term and long-tern financing 5
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Operating Cycle Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company
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This note was uploaded on 03/03/2011 for the course MARKETING 101 taught by Professor Singh during the Spring '11 term at Management Development Institute.

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session 11 wcm - LEARNING OBJECTIVES 1 Underline the need...

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