Chapter 8 Overview of Working Capital anagement 8-1
8-1 Chapter 8 Overview of Working Capital Management
Overview of Working Capital Management Working Capital Concepts Working Capital Issues Financing Current Assets Short-Term and Long-Term Mix Combining Liability Structure and current asset decisions 8-2
8-2 Overview of Working Capital Management Working Capital Concepts Working Capital Issues Financing Current Assets: Short-Term and Long-Term Mix Combining Liability Structure and Current Asset Decisions
Working Capital Concepts Net Working Capital Current Assets- Current Liabilities Gross Working Capital The firm's investment in current assets Working Capital Management The administration of the firm's current assets and the financing needed to support current assets. 8-3
8-3 Working Capital Concepts Net Working Capital Current Assets - Current Liabilities. Gross Working Capital The firm’s investment in current assets. Working Capital Management The administration of the firm’s current assets and the financing needed to support current assets
Significance of Working Capital Management In a typical manufacturing firm, current assets exceed one-half of total assets Excessive levels can result in a substandard Return on Investment(Rol) Current liabilities are the principal source of external financing for small firms Requires continuous, day-to-day managerial supervision Working capital management affects the company' s risk, return, and share price 8-4
8-4 Significance of Working Capital Management In a typical manufacturing firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment (ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. Working capital management affects the company’s risk, return, and share price
orking Capital Issues Optimal Amount(Level)of Current Assets Assumptions 50,000 maximum Policy A units of production i Policy B Continuous Policy C production u00 Three different Current Assets policies for current asset levels are possible 25,000 50,000 OUTPUT(units) 8-5
8-5 Working Capital Issues Assumptions 50,000 maximum units of production Continuous production Three different policies for current asset levels are possible Optimal Amount (Level) of Current Assets 0 25,000 50,000 OUTPUT (units) ASSET LEVEL ($) Current Assets Policy C Policy A Policy B