Aspects and Elements Related to Working Capital Management
Aspects and elements related to
Working Capital Management
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Prepared by: Ahmed O. Sultan
- An important responsibility of the financial manager is overseeing the firm 's day to day financial activities. This area of finance known as Working capital management, is concerned with management of the firm 's current accounts to achieve his goal which is the balance between profit and risk that maximizes the firm 's value by managing each of the firm 's current assets (Cash, Marketable securities, Accounts receivables and Inventories) and current liabilities represent the firm 's short term financing.¹
- Net Working Capital: is defined as current assets minus current liabilities.
- Liquidity Ratios provide information about the firm 's ability to meet its short term financial obligations 1. Working Capital Ratio (Current Ratio) is the ratio of current assets to current liabilities, but inventory may include many items that are difficult to liquidate quickly. 2. Quick Ratio (Acid Ratio) is the ratio of current assets excluding the inventory to current liabilities. 3. Cash Ratio is the most conservative liquidity ratio, it exclude all current assets except the most liquid: cash and cash equivalents such as marketable securities and time deposits over current liabilities. it is an indication of the firm 's ability to pay off current liabilities if for some reason immediate payment were demanded.²
- Working Capital policy: refers to the firm 's policies regarding 1. Target levels for each category of current assets. 2. How current assets will be financed.
- The Cash Conversion Cycle:-
It is used to analyze the effectiveness of the firm 's working capital management. So it focuses on the length of time between when the company makes payments and when it receives cash inflows. Can be expressed by this equation:
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Working Capital Management
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Prepared by: Ahmed O. Sultan
- An important responsibility of the financial manager is overseeing the firm 's day to day financial activities. This area of finance known as Working capital management, is concerned with management of the firm 's current accounts to achieve his goal which is the balance between profit and risk that maximizes the firm 's value by managing each of the firm 's current assets (Cash, Marketable securities, Accounts receivables and Inventories) and current liabilities represent the firm 's short term financing.¹
- Net Working Capital: is defined as current assets minus current liabilities.
- Liquidity Ratios provide information about the firm 's ability to meet its short term financial obligations 1. Working Capital Ratio (Current Ratio) is the ratio of current assets to current liabilities, but inventory may include many items that are difficult to liquidate quickly. 2. Quick Ratio (Acid Ratio) is the ratio of current assets excluding the inventory to current liabilities. 3. Cash Ratio is the most conservative liquidity ratio, it exclude all current assets except the most liquid: cash and cash equivalents such as marketable securities and time deposits over current liabilities. it is an indication of the firm 's ability to pay off current liabilities if for some reason immediate payment were demanded.²
- Working Capital policy: refers to the firm 's policies regarding 1. Target levels for each category of current assets. 2. How current assets will be financed.
- The Cash Conversion Cycle:-
It is used to analyze the effectiveness of the firm 's working capital management. So it focuses on the length of time between when the company makes payments and when it receives cash inflows. Can be expressed by this equation:
CCC
References: - 1. Eugene F. Brigham; Joel F. Houston; ' 'Fundamentals of Financial Management ' '; Fourth edition; South Western - Thomson; 2004. 2. Stanley B. Block; Geoffrey A. Hirt; ' 'Foundations of Financial Management ' '; Eleventh edition; Mc Graw - Hill Irwin; 2005. 3. Lawrence J. Gitman; ' 'Principals of the Managerial Finance ' '; Fifth & Eighth editions; Harper and Row, Publishers, New York; 1988. 4. Internet Center for Management & Business Administration, Inc.; NetMBA.com. Copyright © 2002-2007.