WC and ST Financing (1)

WC and ST Financing (1) - Working Capital and Short-term...

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Unformatted text preview: Working Capital and Short-term Finan 1 Working Capital and Short-Term Financing Unlocking the Firms Working Capital Needs and Financing Working Capital and Short-term Finan 2 Working Capital and Short-Term Financing Short-term financial management involves making decisions regarding the management of the firms current assets and liabilities. With short-term financial management the firm must decide how much working capital the company should carry and how such working capital is financed. Working capital is generally defined as the difference between current assets and current liabilities and when current assets exceed current liabilities the firm is said to have positive working capital while if current liabilities exceed current assets the firm is said to have negative working capital. Working Capital and Short-term Finan 3 Working Capital and Short-Term Financing The prime objective of short-term financial management is to provide a balance whereby the firm holds adequate working capital to reduce the risk of illiquidity while at the same time does not hold excess working capital which reduces the firms profitability. Working Capital and Short-term Finan 4 Financing Strategies A firms choice of a working capital financing strategy is dependent on both the firms financing needs as well as the risk related to having not be able to quickly obtain adequate financing when the need arises. A firms financing needs can be determined by examining the level of assets held by a firm throughout the year. By monitoring the firms assets one can determine what portion of assets at a minimum must be maintained as well as any seasonal asset requirements. Working Capital and Short-term Finan 5 Financing Strategies The minimum level of assets a firm holds generally consists of their fixed assets as well as a certain minimum amount of current assets since at any given time the firm is likely to maintain at least some balances in cash, A/R, and inventory. This minimum amount of assets held is referred to as the firms permanent assets. Any assets held in excess of permanent assets are referred to as seasonal assets. Consider the example on the following page which shows a companys expected fixed and current asset requirements during a given year. Working Capital and Short-term Finan 6 Asset Requirements and Funding Current Fixed Total Permanent Seasonal Excess Month Assets Assets Assets Assets Assets Funding Jan $9,000 $28,000 $37,000 $29,000 $8,000 $6,000 Feb $7,000 $28,000 $35,000 $29,000 $6,000 $8,000 March $5,000 $28,000 $33,000 $29,000 $4,000 $10,000 April $2,000 $28,000 $30,000 $29,000 $1,000 $13,000 May $1,000 $28,000 $29,000 $29,000 $0 $14,000 June $1,000 $28,000 $29,000 $29,000 $0 $14,000 July $2,000 $28,000 $30,000 $29,000 $1,000 $13,000 August $3,000 $28,000 $31,000 $29,000 $2,000 $12,000 Sept. $7,000 $28,000 $35,000 $29,000 $6,000 $8,000 Oct. $9,000 $28,000 $37,000 $29,000 $8,000 $6,000 Nov. $11,000 $28,000 $39,000 $29,000 $10,000 $4,000 Dec. $15,000 $28,000 $43,000 $29,000 $14,000 $0 Working Capital and Short-term Finan...
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WC and ST Financing (1) - Working Capital and Short-term...

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