Preview

The Fundamentals of Working Capital Management

Satisfactory Essays
Open Document
Open Document
357 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Fundamentals of Working Capital Management
The Fundamentals of Working Capital Management

Working Capital refers to the company’s current or short-lived assets. This includes cash, marketable securities, notes receivable, account receivable, inventories and other current assets.

Non-current assets are referred to as capital assets. These are long-term assets and are mostly depreciable in nature. In evaluating an investment in capital assets, the future cash flows, the risk of those cash flows as well as the opportunity cost of the funds invested must be taken into consideration.

Working capital provides the resources to put up a capital asset in operation while the capital asset in turn is expected to generate future cash flows to become future working capital.

Factors that affect the level of investments in working capital

• Type of business/product • Length of the operating cycle • Degree of uncertainty of the business • Practices and traditions

Aggressive vs. Conservative Working Capital Management

|Aggressive |Conservative |
|Preference for minimum level of working capital |Maintains maximum level of working capital |
|Advantages |Disadvantages |Advantages |Disadvantages |
|Saves on carrying costs |Losses due to stock outs |Avoids risk of losses due to |High carrying costs |
| | |stock outs | |
|Maintains active relationship |Bad credit reputation |Good credit reputation |Lost opportunities when funds |
|with bankers | | |are tied up in non-earning |
| |

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Working capital refers to the short term decisions relating to financing. If the working capital is neglected in any way, it can cause a company to go bankrupt. If this occurs, it means that employees will not get paid and suppliers will not get the proper funding for the supplies that were already ordered. Management of the working capital has to be strict. Policies will need to be put into place where everything is managed correctly. When there is a fault in the management of the policy, workers should come together and implement a plan that will allow for the decisions that were previously made to be taken into effect.…

    • 529 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Minimizing Working Capital

    • 1200 Words
    • 5 Pages

    Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses.…

    • 1200 Words
    • 5 Pages
    Better Essays
  • Good Essays

    Working capital is simply the difference between a firm’s current assets and current liabilities. Emery, Finnerty, and Stowe states, “working capital provides a measure of the firm’s liquidity, or its ability to meet its short-term obligations as they come due” (2007, p. 47). Working capital policy is an extremely important element in the monetary strategy of large firms. Leadership must be able to lie out a policy that will make use of the firm’s resources most efficiently. The ability for leadership…

    • 5041 Words
    • 21 Pages
    Good Essays
  • Powerful Essays

    Working capital management is critical for business. Inappropriate working capital management will lead to major problems for the operations of the company. Management of the company has to make estimation about future expected sales, costs and so…

    • 1856 Words
    • 7 Pages
    Powerful Essays
  • Satisfactory Essays

    A financial metric that ensures operating liquidity of a firm, business organization or any other entity including governmental entities is known as working capital. Working capital is the difference between the current assets and liabilities of an organization determining the amount of debt acquired to finance its assets. George had also borrowed loan from bank in order to finance the purchase of inventory for his shop. In addition, he also invests certain amount of personal equity to avoid bankruptcy.…

    • 410 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Working capital is an important part of any business. By definition, working capital is the amount of money a company has to meet their liabilities. It is calculated by subtracting liabilities from assets. In order to keep a business running the amount of working capital should remain positive. However, this is not always the case. Many factors determine the amount of working capital for a business. One of these factors is the decisions made to either accept or decline certain opportunities that will affect sales, inventories, accounts receivable, and the bottom line. Sunflower Nutraceutacils is currently running neck and neck.…

    • 1241 Words
    • 5 Pages
    Better Essays
  • Good Essays

    The working capital indicates the liquidity of the company and how fast it can convert assets into cash in a company. In order to figure out how much working capital a company has, it is current assets over current liabilities. Microsoft’s current assets are $74,918 million dollars, and the current liabilities are $28,774 million dollars. In order to successfully manage working capital, the firm has to set the policies of managing the current assets, short term financing. There are four part of management of working capital these are; cash management, inventory management, debtor management, and short term financing. Cash management is to identify the cash balance which allows reducing cash holding cost but still able to meet day to day expenses. Inventory management is to understanding the level of inventory which allows…

    • 1201 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Fixed assets are non-current assets that the company acquired such as real properties, office equipment like printers, faxes machines, telephones as well as tractors, computers and other production equipment. These items are categorised under company’s PPE account. The PPE account is also called long-term assets account or capital resources account. The fixed assets are subject to depreciation for tax reporting purposes. Therefore, the owners are responsible to employ sound procedures to ensure prompt and accurate reporting of the capital purchases over time. Nevertheless, these non-liquid assets cannot be sold directly to customers.…

    • 522 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Working Capital – Money available for day-to-day running of the business. Retained profit, reducing inventory and tighter credit control all fall under this heading…

    • 6493 Words
    • 33 Pages
    Powerful Essays
  • Satisfactory Essays

    Business 2

    • 348 Words
    • 2 Pages

    Money to fund the day to day workings of the business. Commonly called working capital: current assets (invitatories, receivables) less current liabilities (overdrafts, creditors). The main types- bank overdrafts, bank bill and trade credit…

    • 348 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Working capital management is basically the planning as well as being in control of how much and the mixes of those new assets from the business along with financing assets. To be more specific, it requires managers to make decisions about how much money, along with the liquid assets and the inventories that the business…

    • 697 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Saurashtra University Re – Accredited Grade ‘B’ by NAAC (CGPA 2.93) Solanki, Ashvinkumar H., 2009, Working Capital Management in Selected Small Scale Industries of Gujarat State, thesis PhD, Saurashtra University http://etheses.saurashtrauniversity.edu/id/eprint/66 Copyright and moral rights for this thesis are retained by the author A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author…

    • 64902 Words
    • 260 Pages
    Powerful Essays
  • Powerful Essays

    In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.…

    • 1920 Words
    • 8 Pages
    Powerful Essays
  • Satisfactory Essays

    Working Capital Cycle

    • 232 Words
    • 2 Pages

    -Working capital cycle is a firm’s current assets. Current assets are those that the firm’s expect to convert into cash within a year.…

    • 232 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Working Capital refers to the amount of day to day operating liquidity available to a business. This business belongs to the tertiary sector so there exist no raw materials which change in the course of production.…

    • 670 Words
    • 3 Pages
    Satisfactory Essays