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Financial management 11, Short-term sources of income, Net working capital…
Financial management 11
UNIT 1
Finance
Current assets and liabilities: converted into cash within 12 months (short-term nature)
working capital management.
Working capital
The current assets and liabilities that are used to conduct the day-to-day operations of a company is referred to as
working capital.
Cash inflows
Cash outflows
NET WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
Cash
Transaction motive
Safety motive
Unforeseen circumstances
Speculative motive
Take advantage of Opportunities
Inventory
Accounts receivable
Accounts payable
"Creditors"
Interest free
Increases profitability
Disadvantage:
Payment done 30 ~ 90 days
The management of working capital is based on the principle that money is borrowed to purchase inventory > finished products > sold to repay the loan > repeat
CREDIT in the form of accounts receivable and accounts payable
Working capital requirements
Aggressive
working capital is low when compared to total company assets
Conservative
working capital is high when compared to total company assets
Liquidity
Ability to pay short term obligations when they become due
Investment in Trade debtors and inventory must be kept low
refers to a company’s strategy on how current assets and liabilities will be used to ensure that the day-to-day operations can be conducted successfully
Short-term sources of income
Bank overdrafts
Net working capital refers to the difference between current assets and current liabilities.