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• Working capital is the amount of current assets (financial management view) or current

  assets net of current liabilities (accounting view) used to finance the firm’s short term

  operations.
• Working capital - the amount used to finance the firm’s short term operations.
• Current assets – those convertible to cash w/in 1 year or normal operating cycle, w/c ever is longer.
• Temporary current assets – current assets required to support fluctuations of the firm’s level of activity.
• Temporary current assets - also called the volume of operations.
• Permanent current assets – current assets required to maintain normal operations.
• Current liabilities – obligations to be paid w/in 1 year.
• Working capital - the lifeblood of the business organization.
• Current asset - needed to sustain the normal operations of the business.
• Working Capital Management - refers to the efficient and effective utilization of working capital to attain organizational objectives.
• attain organizational objectives related to:

  • Profitability of operations
  • Liquidity of financial resources
  • Minimization of risks & company costs
• WCM involves managing the company’s liquidity which in turn involves managing:

  • The company’s investment in current assets
  • The company’s use of current liabilities
• Working Capital Management - covers both setting the working capital policy and carrying it out in daily operations.
• Working capital policy refers to the basic decisions regarding:

  • Target levels for each category of current assets.
  • How current assets will be financed.
• Kinds of Working Capital Policy

  • Investment Policy
  • Financing Policy
• Relaxed Current Investment Policy – carries a relatively large amount of current assets.
• liberated credit policy - resulting to high level of receivables.
• Restricted Current Investment Policy – current assets are minimized.
• Tight credit policy - running the risk of losing sales, holds minimal safety stock of cash and inventory, and works out the highest current asset turnover.
• Restricted Current Investment Policy - provides the highest expected ROI but entails the greatest risk.
• Moderate Current Investment Policy – policy between relaxed & restricted.
• Conservative Policy – almost all investment assets are financed by long term debts, resulting to lesser amounts of short term debts.
• Conservative Policy - It reduces liquidity risk but also reduces profit due to greater financing costs.
• Aggressive Policy – uses short term debts to finance, not only temporary but also part or all of the permanent current asset requirements.
• Maturity Matching Policy – It matches the maturities of obligations to the income (cash flow) generating

  characteristics of the assets financed.
• Balanced Policy – balances the trade-off between risk and profitability in a manner consistent with its attitude toward bearing risk.
• Permanent – refers to property, plant & equipment (fixed assets) and permanent current assets that must always be with the company throughout the year.
• Temporary – additional requirements arising from fluctuation in the volume of activity
• Types of Investment Policy

  • Relaxed Current Investment Policy
  • Restricted Current Investment Policy
  • Moderate Current Investment Policy
• Types of Financing Policy

  • Conservative Policy
  • Aggressive Policy
  • Maturity Matching Policy
  • Balanced Policy
• Financing Requirements:

  • Permanent
  • Temporary
• Asset mix decision – appropriate mix of current and noncurrent assets.
• Financing mix decision – appropriate mix of short term & long term debts to finance current assets.
• Cash Management – involves the maintenance of cash & marketable securities (MS) investment level.
• Transactional motive – to facilitate normal transactions of the business
• Contractual motive – to meet bank (creditor) requirements contained in a financing agreement.
• Precautionary motive – to provide buffer against contingencies like unexpected delay in collection of receivables
• Speculative motive – to take advantage of special income opportunities