1. MANAGEMENT OF WORKING CAPITAL
Financial Management
MANAGEMENT OF WORKING CAPITAL

2. What is Working Capital?
Working capital typically means net current assets which are available for day-to-day operating activities. It normally includes
inventories,
receivables,
cash (and cash equivalents), less
payables.
Working capital = inventory + receivables + cash – payables

3. Investment in Working Capital?
Working capital needs financing, just as does the investment in machines.
Investment
Fixed Assets
Earn Profits
Investment in working capital does not directly earn profits. If this were the only consideration, then it would be better to invest all the finance available in fixed assets and to keep working capital to an absolute minimum
Working capital = receivables + cash + inventory – payables

4. Working Capital Trade-off
Profitability
Liquidity
Optimum Level of Working Capital
The company therefore faces a trade-off between profitability and liquidity, and it is up to the financial manager to decide on the optimal level of working capital and to ensure that it is managed properly

5. What is Working Capital?
On the other hand, all companies need some working capital in order to keep the business running
Customer
Customers should be allowed to buy on credit, otherwise company would lose business to competitors
Inventory
Company’s need to carry inventories of finished goods in order to be able to fulfil demand
Cash
they need to have a short-term cash balance in order to be able to pay their bills

6. Financing of Working Capital
Long Term Financing
Equity shares or Long-term borrowings
Expensive and less risky as it is repayable on an agreed period
Long Term Assets – Fixed Assets
Short Term Financing
Overdraft
Delaying payments to creditors
Cheaper and risky as it is repayable on demand
Short Term Assets - Inventories

7. Financing of Working Capital
Permanent Working Capital
Working Capital Remains Fixed
Long Term
Finance Through Long Term Financing
Temporary Working Capital
Day-to-day fluctuation of Working Capital
Short Term
Finance Through Short Term Financing