Working Capital Essay

4151 WordsFeb 26, 201517 Pages
Working Capital Management Working Capital Management – the administration and control of working capital (i.e., current assets) and current liabilities to achieve a balance between profitability and risk that contributes positively to the firm’s value. Working Capital (Current Assets) – assets that are reasonably expected to be realized in cash or consumed or sold during the normal operating cycle of the business. They include cash, marketable securities, receivables and inventory. Temporary (Seasonal) Current Assets – current assets that fluctuate with the firm’s operational needs. Permanent Current Assets – the portion of the company’s current assets required to maintain the firm’s daily operations. It is the minimum level of current assets required if the firm is to continue its operations. Current Liabilities – liabilities that are expected to be liquidated within one business cycle through the use of working capital or incurrence of other current liabilities. Reasons Why Working Capital Management is Important 1. Working capital comprises a large portion of the firm’s total assets. Although the level of working capital varies widely among different industries, firms in manufacturing and trading industries more often than not, keep more than half of their assets in current assets. 2. The financial manager has considerable responsibility and control in managing the level of current assets and current liabilities. 3. Working capital management directly affects the firm’s long-term growth and survival because higher levels of current assets are needed to support production and sales growth. 4. Liquidity and profitability are likewise directly affected by working capital management. Factors Affecting the Firm’s Working Capital Policy 1. Nature of Operations 2. Volume of Sales 3. Variation of Cash Flows

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