Working capital management - Basic Basic Concepts of Working Capital

1. Working Capital Management
BBA 16th Batch (Section: A)
Department Of Accounting & Information
Systems
University Of Dhaka

2. Basic Concepts of Working Capital
 Gross working capital refers to current
assets used in operations.
 Net working capital is: Current assets minus
current liabilities.
 Net operating working capital:
Operating CA – Operating CL
(Cash + A/R + Inventory) – (A/P + Accruals)
 Working capital policy involves decisions
about company’s current assets and current
liabilities.
 Working capital management is a
continuous process that involves a number
of day-to-day operations and decisions.
2

3. Working Capital Policy
 The firm’s level of working capital
investment;
 Proportion of short-term and long-term debt
to finance its assets;
 The nature/source of any short-term
financing used;
 How each component of working capital is
managed.
3

4. Cash and Operating Cycle
4

5. Cash and Operating Cycle
5

6. Operating Cycle
 Inventory conversion period
 Receivables conversion period/average
collection period/DSO
 Payable deferral period
6

7. Shortening the Cash Conversion Cycle
 By reducing the inventory conversion
period;
 By reducing the receivables collection
period;
 By lengthening the payables deferral period.
(Brigham 573,574)
7

8. 1. Levels of Working Capital Investment
8

9. Types of Current Assets
9

10. (Maturity) Matching or “Self-Liquidating” Approach to Asset Financing
10
2. Proportion of Short- and Long-Term Financing

11. 11
2. Proportion of Short- and Long-Term Financing
Conservative Approach to Asset Financing

12. 12
2. Proportion of Short- and Long-Term Financing
Aggressive Approach to Asset Financing