Working Capital

Question	Answer
Net Working Capital	Current Assets - Current Liabilities.
Gross Working Capital	The firm’s investment in current assets.
Working Capital Management	The administration of the firm’s current assets and the financing needed to support current assets.
HAVING TOO MUCH WORKING CAPITAL HAS WHAT AFFECT ON RISK	REDUCES RISK
What is the task of the financial manager in relation to working capital?	to achieve the level of investment in working capital which gives the appropriate level of risk and return
A second key task in managing working capital is managing the rate of asset turnover of the various current assets, particularly stock and debtors. What effect does asset turnover have on investment?	Essentially the more frequently assets are turned over (replaced), the less the investment required.
What is the Cash Operating Cycle?	The cash operating cycle is the length of time between the firm’s cash payment for purchases of material and the cash receipt from sale of goods
How is COC (Cash Operating Cycle) Calculated?	COC = Stock period + debtor period - creditor period
What are Permanent Current Assets?	The amount of current assets required to meet a firms long term minimum needs. A company will always have some stock and receivables.
What are the competing Demands within a company in relation to working capital?	The financial manager will attempt to secure the balance and rate of asset turnover which achieves the optimum investment in working capital from a financial viewpoint. However other functional managers will have their own views. Marketing/sales managers will prefer to have stock on hand to satisfy customer demand without delay and also to offer generous credit terms.
Explain what the Short term / Long Term mix is in relation to Financing and Working Capital?	Investments in working capital (stock, receivables) require financing and a decision is required regarding the mix of finance (short term/long term) to be used. Short term finance tends to be cheaper but riskier whereas long term finance is more expensive but safer.
What is Hedging (or Maturity Matching) Approach	A method of financing where each asset would be offset with a financing instrument of the same approximate maturity.
Why is Financing Needs and the Hedging Approach	Fixed assets and the non-seasonal portion of current assets are financed with long-term debt and equity (long-term profitability of assets to cover the long-term financing costs of the firm). Seasonal needs are financed with short-term loans (under normal operations sufficient cash flow is expected to cover the short-term financing cost).
What are the Long-Term Financing Benefits?	Less worry in refinancing short-term obligations Less uncertainty regarding future interest costs
What are the Long-Term Financing Risks?	Borrowing more than what is necessary Borrowing at a higher overall cost (usually)
What is Risks vs. Costs Trade-Off (Conservative Approach)?	Manager accepts less expected profits in exchange for taking less risk.
How can the risk of Short term Borrowing be reduced?	Firm can reduce risks associated with short-term borrowing by using a larger proportion of long-term financing.
What are Short-Term Financing Benefits ?	Financing long-term needs with a lower interest cost than short-term debt Borrowing only what is necessary
What are Short-Term Financing Risks ?	Refinancing short-term obligations in the future Uncertain future interest costs
What is Risks vs. Costs Trade-Off Aggressive Approach?	Manager accepts greater expected profits in exchange for taking greater risk
Firms increases risks associated with short-term borrowing by using a larger proportion of short-term financing.	Firms increases risks associated with short-term borrowing by using a larger proportion of short-term financing.

Next up

Description

Resource summary

Similar

	Created by Denise Harper over 9 years ago