Working Capital Management Lecture1 Introduction to Working Capital

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Working Capital Management Lecture-1 Introduction to Working Capital By Imran Khan

Working Capital Management Lecture-1 Introduction to Working Capital By Imran Khan

Definition What is working capital? Working Capital is the amount of money that a

Definition What is working capital? Working Capital is the amount of money that a company has tied up in funding its day to day Operations.

Some basic definitions • Working Capital or Gross Working Capital refers to the current

Some basic definitions • Working Capital or Gross Working Capital refers to the current assets used in operations. • Net Working Capital is defined as current assets minus current liabilities. • Net Operating Working Capital (NOWC) is defined as operating current assets minus operating current liabilities. NOWC= (cash, accounts receivable, inventories) – (accounts payable, accruals)

Classification of working capital

Classification of working capital

Objective of Working Capital Management

Objective of Working Capital Management

Cash Conversion Cycle Inventory = Conversion Period Receivables + Collection Period - Payables Deferral

Cash Conversion Cycle Inventory = Conversion Period Receivables + Collection Period - Payables Deferral Period Cash Conversion Cycle Firms follow a cycle in which they purchase inventory, sell goods on credit and then collect accounts receivable. The cash conversion cycle focuses on the time between payments made for materials and labor and payments received from sales.

Cash Budget • Cash budgets are used by the companies for planning and control.

Cash Budget • Cash budgets are used by the companies for planning and control.

What is trade credit? • Trade credit is credit furnished by a firm’s suppliers.

What is trade credit? • Trade credit is credit furnished by a firm’s suppliers. • Trade credit is often the largest source of shortterm credit, especially for small firms. • Spontaneous, easy to get, but cost can be high.

Commercial paper • Short term notes issued by large, strong companies. • CP trades

Commercial paper • Short term notes issued by large, strong companies. • CP trades in the market at rates just above T-bill rate. • CP is bought with surplus cash by banks and other companies, then held as a marketable security for liquidity purposes.