Working Capital Management

Financing Working Capital

Working Capital

      Total investment in current assets

      Current assets are


  Accounts Receivable


      Net working capital is current assets minus current liabilities.

Working Capital Decisions

      The level of investment in current assets

  How much to hold

      The method of financing current assets

  Long or short term financing of current assets.

Working Capital Issues level of working capital

      Increasing production leads naturally to increased levels of current assets.

      A risky approach is to keep current assets at only the min level required to meet the new production.

  More chance for profit.

  But risky as less liquidity.

Level of working capital continued.

      A less risky approach is to keep a larger level of current assets for the production level

  More liquid less risk

   Cash will be there to pay bills

  Less chance of profit

   Profit likely to be less.

Nature of current assets


  More during months of greater sales and production

      Permanent current assets are required to meet a firms long term minimum needs.

      Temporary current assets fluctuate on a seasonal or cyclical basis.

Financing of Current Assets.

      Short time, self liquidating assets.


  Accounts Payable

   Buy the stock

  Merchandise inventory

   Hold the stock

  Accounts receivable

   Sell the stock


   Collect the cash.

Financing the current Assets

      Arrange finance to pay the supplier.

      This allows for a higher level of current assets to keep this level high until collection is made.

Short term loans self liquidating

      Seasonal inventory purchases above current levels

Financing needs

      Fixed assets and non-seasonal current assets are financed with long-term debt and equity.

      Season needs are financed with short term loans.

Lower risk

      Finance more of those current assets with long term loans

      Risk vs. Return trade-off

      Paying more for the loan but have cushion of cash

Higher risk higher return

      Finance less of current assets with long term financing.

      Lower interest rates

      Borrow less

      Take a risk on future rates

      Accept greater profit and greater risk.

Homework execises

      Discussion Questions 6,7

      Problems 3,4,5,6,8