01. Working Capital Policy

01. Working Capital Policy - 9/22/2010 Working Capital and...

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9/22/2010 1 Working Capital Policy Working Capital and Working Capital Policy ± Working capital ² Firm’s investment in short-term assets, i.e., cash, marketable securities, account receivables and inventory receivables and inventory. ± Net working capital current asset – current liabilities ± Working capital management ² Management of short-term assets and liabilities. Working Capital and Working Capital Policy ± Working capital policy ² Firm’s basic policy (decisional guidelines) regarding ± What levels of each category of current assets should maintained. ± How current assets will be financed. Need for Working Capital Management ² Cash and cash equivalents needed to meet day-to-day payment requirements. ² So it is imperative to ensure the inflow of adequate funds. ² Excess cash means idle money losing the opportunity to invest them. ² Accounts receivable has to be managed to ensure they are collected and promptly. ² Inventory has to be managed to protect against high cost, stock out, and wastage. Relationships Among Working Capital Accounts Cash Conversion Cycle ( CCC ) ± Length of time from the purchase of raw materials on credit to the payment to the suppliers after raw materials have been converted into finished goods and then sold.
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9/22/2010 2 Cash Conversion Cycle ( CCC ) ± Inventory Conversion Period ( ICP ) ² Average length of time required to convert raw materials into finished goods and to sell them. ² It is the time the product remains as inventory in different stages of completion. Sales/360 Inventory ICP = Cash Conversion Cycle ( CCC ) ± Days Sales Outstanding (DSO) ² Average length of time required to convert the firm’s receivables into cash, i.e., to collect cash following sales. Sales/360 receivable Accounts DSO = Cash Conversion Cycle ( CCC ) ± Payable Deferral Period (DPO) ² Average length of time taken from the purchase of supplies to the payment to the suppliers, i.e., to make payment following purchases.
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01. Working Capital Policy - 9/22/2010 Working Capital and...

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