FIN 242-Chapter 4

What is working capital ?

• the firm's current assets

• the remaining current assets(CA) after all current liabilities(CL) are paid

• a process of administering/managing CA and CL using the guidelines stated in a firm's WC policy

• The firm's guidelines on the appropriate levels of each category of CA and how to finance those CA

What is Working Capital Policy ?

• the remaining current assets(CA) after all current liabilities(CL) are paid

• The firm's guidelines on the appropriate levels of each category of CA and how to finance those CA

• the firm's current assets

• a process of administering/managing CA and CL using the guidelines stated in a firm's WC policy

The firm needs to make decisions on ? 2 answer

• How to finance those CA

• the remaining current assets(CA) after all current liabilities(CL) are paid

• How much CA to maintain

• Save time in managing the WC

Factors affecting WC?

• Business cycle

• Seasonal fluctuations

• Nature of busy business

• Length of the operating cycle

Importance of CA ?

• Save time in managing the WC

• the remaining current assets(CA) after all current liabilities(CL) are paid

• The firm's guidelines on the appropriate levels of each category of CA and how to finance those CA

• Directly related to sales growth and CA investment

What are the 3 types of Assets in WCM Approaches ?

• Temporary current asset

• Permanent current asset

• Permanent non-current asset

• Fixed assets

What are the 3 sources of financing in WC ?

• Short-term/Temporary financing

• Permanent Financing

• Continuous financing

• Spontaneous financing

What is Conservative Approach ?

• Lowest risk among all

• invest excess funds in marketable securities during low requirements

• moderate risk with moderate returns

• Self-liquiditing approach

What is Hedging Approach ?

• Lower risk, lower return

• Moderate risk

• emergency funds and idle funds are non-existent

• invest excess funds in marketable securities during low requirements

What is Aggressive Approach ?

• Moderate risk, moderate returns

•  invest excess funds in marketable securities during low requirements

• Involves more risk as it uses short-term financing

• •  risky approach bcs exposed to the rise of interest rates and renewal problems