Working Capital Management
WORKING CAPITAL MANAGEMENT:
Investment Decisions for Current Assets
Compiled by
Dr D. M. L. Kasilo
(MBA, CPA, PhD)
1 Working Capital: What is it?
1.1 Introduction
As a matter of principal, any understanding of financial management theories and best practices depends much on ones understanding of the balance sheet model. Figure 1, is adopted to facilitate discussions on working capital management practices.
Figure 1:The Balance Sheet Model? Financial Expression of an Entity
GREENLULU CORPORATION
Balance Sheet as at March 31, 2000
ASSETS LIABILITIES AND SHAREHOLDERS EQUITY
1. Gross Working Capital = Level of Investment in Current Assets
Working capital (gross) refers to total current assets that sustain day-to-day business operations. According to the balance sheet model (figure 1), the main components of current assets include: Cash, Marketable Security, Notes Receivable, Accounts Receivable, and Inventories of Raw materials, Work-in-Progress, and Finished goods
Concluding Remark
Inefficient management of working capital can dramatically affect a company's cash flow. Take about one minute; ponder the impact to cash flows of inefficient management of each major component of current assets.
1.1.2 Financing Level of Investment in Current Assets/Gross Working Capital
(i) Current assets [gross working capital] have to be financed. This needs short-term financing decisions. The question, `how do we finance current assets' needs of the corporation' has to be answered.
(ii) Current liabilities are the main sources of financing current assets, that is, current liabilities mainly finance current assets: According to the balance sheet model (figure 1), typical current liabilities include: - NOTES PAYABLE, ACCOUNTS PAYABLE, ACCRUED LIABILITIES, and BANK LOANS/OVERDRAFT
Investment Decisions for Current Assets
Compiled by
Dr D. M. L. Kasilo
(MBA, CPA, PhD)
1 Working Capital: What is it?
1.1 Introduction
As a matter of principal, any understanding of financial management theories and best practices depends much on ones understanding of the balance sheet model. Figure 1, is adopted to facilitate discussions on working capital management practices.
Figure 1:The Balance Sheet Model? Financial Expression of an Entity
GREENLULU CORPORATION
Balance Sheet as at March 31, 2000
ASSETS LIABILITIES AND SHAREHOLDERS EQUITY
1. Gross Working Capital = Level of Investment in Current Assets
Working capital (gross) refers to total current assets that sustain day-to-day business operations. According to the balance sheet model (figure 1), the main components of current assets include: Cash, Marketable Security, Notes Receivable, Accounts Receivable, and Inventories of Raw materials, Work-in-Progress, and Finished goods
Concluding Remark
Inefficient management of working capital can dramatically affect a company's cash flow. Take about one minute; ponder the impact to cash flows of inefficient management of each major component of current assets.
1.1.2 Financing Level of Investment in Current Assets/Gross Working Capital
(i) Current assets [gross working capital] have to be financed. This needs short-term financing decisions. The question, `how do we finance current assets' needs of the corporation' has to be answered.
(ii) Current liabilities are the main sources of financing current assets, that is, current liabilities mainly finance current assets: According to the balance sheet model (figure 1), typical current liabilities include: - NOTES PAYABLE, ACCOUNTS PAYABLE, ACCRUED LIABILITIES, and BANK LOANS/OVERDRAFT