8/6/2019 Financial Management "Working Capital"
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By Comsats University
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Presented By:
Asjad BashirFA10-MBA-071Ansar Manzoor...FA10-MBA-072
Fahad KhalilFA10-MBA-078
M.Jawad..FA10-MBA-076M.Safdar..FA10-MBA-069
Nabeel Ghafoor..FA10-MBA-095
Presented To:
Mam: Syeda Mahlaqa Hina
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Topic
Combining Liability Structure and
Current Asset Decisions
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Short-Term Liquidity RisksWorking capital: The excess (deficit) of
current assets minus current liabilities.
WC = CA - CL
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Working Capital refers to the amount of capital
which readily available to the company.
W
orking Capital
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Combining Liability Structure and
Current Asset Decisions
The level of current assets and the method of
financing those assets are interdependentinterdependent.
A conservative policy of high levels of
current assets allows a more aggressive method
of financing current assets.
A conservative method of financing(all-equity) allows an aggressive policy of
low levels of current assets.
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Combining Liabilities
In the combining of liabilities we use two
Policies.
1. Conservative Policy.
2. Aggressive Policy.
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Conservative Policy:
FirmFirm cancan reducereduce risksrisks associatedassociated withwith shortshort--termterm borrowingborrowing
byby usingusing aa largerlarger proportionproportion ofof longlong--termterm financingfinancing..
Aggressive Policy:
FirmFirm increasesincreases risksrisks associatedassociated withwith shortshort--termterm borrowingborrowing
byby usingusing aa largerlarger proportionproportion ofof shortshort--termterm financingfinancing..
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Working capital deficiency
In working capital management if current assets are less
than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.
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Combining Liability Structure and
Current Asset Decision.
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Current assets
An entity shall classify an asset as current when:
It expects to realise the asset, or intends to sell or consume it, inits normal operating cycle;
It holds the asset primarily for the purpose of trading;
It expects to realise the asset within twelve months after thereporting period; or
The asset is cash or a cash equivalent unless the asset isrestricted from being exchanged or used to settle a liability forat least twelve months after the reporting period.
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The Working Capital Decision
With the working capital decision, current assets and currentliabilities become the focus of the financial manager.
Such items as cash balances, accounts receivable, inventory
levels and short-term accruals (such as prepaid rent orutilities) are included among the short-term assets thatcomprise one component of working capital.
Also with the working capital decision, we concern ourselveswith short-term obligations such as accounts payable tovendors, and other debt that is expected to be paid off withinone year.
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Working capital management involves financing and
controlling the current assets of the firm.
Management must distinguish between those current
assets that are easily converted to cash and those that
are more permanent.
The financing of an asset should be tied to how long
the asset is likely to be on the balance sheet.
Asset Decisions:
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Asset Decisions:
Long-term financing is usually more expensive than
short-term financing based on the theory of the term
structure of interest rates.
Risk, as well as profitability, determines the financing
plan for current assets.
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CASH
RAW MATERIALS WORK IN PROGRESS
FINISHED GOODS
ACCOUNTS RECEIVABLE
Operating current assets cycle
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1. Investment decision
2.F
inancial decision
3. Assets management decision
Major Asset Decision:
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Investment decision:
it determines the total amount of asset needed by a firm hence
closely tied to the allocation of funds, we have two types
of investment decision which is capital investment and working
capital investment.
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F
inancial decision: Financial manager needs to decide on how to finance
the assets the source of funds examples whether to
borrow debts or share capital or retained earnings,
whether to borrow short, medium or long term, the
needs to determine how much dividend to pay out as
this will directly affect the financial decision.
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Asset management decision:
once asset has been purchased and appropriate
financing are secured it now involves the efficient and
effective management of current asset like cash
inventories and so on.
i-e examples of assets management is extension of
credit terms to increase sales and to hold more stocks or
on a longer term.
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Comparison of Assets and Liabilities
Current assets and current liabilities should be compared overperiods of time. It is good if the current assets have increasedsignificantly over longer periods of time. This means that thecompany generates cash. On the other hand, it can be alsointerpreted as the company not being able to collect the money
it has to take from its accounts receivable.If the currentliabilities of the company are growing at a fast pace, then there
might be some problem with the company. However, this is notalways bad since the company may incur higher liabilities sinceit needs money to finance some of its goals.
Finally, you should carefully study these indicators of the targetcompany in order to determine its future potentials. You can
quickly and easily obtain this information from financialstatements.
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Thanks to Allah
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