WORKING

CAPITAL AND THE

FINANCING
DECISION
 ◦ Working capital or “gross
working capital” simply
refers to current assets.
Basic
Concepts
◦ Net working capital is the
excess of current assets
over current liabilities.
 Working Capital
Management involves
WORKING the determination of the
CAPITAL level and maturity of
MANAGEMENT
each major current
asset and current
liability.
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Working Capital Policy
What is the appropriate level
for current assets, both in total
and specific accounts?
How should current assets be
financed?
 1. General nature of the
business and product.
2. Effect of sales pattern.
FACTORS
AFFECTING 3. Length of the
LEVEL OF manufacturing process
CURRENT
4. Industry practices
ASSETS
5. Terms of purchases and
sales.
 ◦ 1. The company can
maintain its good credit
standing.
Advantages ◦ 2. Credit may be extended
of adequate
to customers thereby
Working
increasing the sales volume
Capital
of the firm.
◦ 3. Inventories can be readily
replenished.
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 ◦ 4. Current operating
expenses are paid
promptly.
Advantages
of adequate ◦ 5. Management and
Working employee morale is
Capital enhanced
◦ 6. Profitable opportunities
can be taken advantage of.
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 1. Management may
become inefficient and
complacent.

Disadvantages 2. Management may be

of Excessive tempted to speculate.
Working 3. Unnecessary expenses
Capital and extravagance may
result.
4. Resources are not
optimally employed. 8
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 1. Conservative or Relaxed
current asset investment
Alternative policy
Current
Asset 2. Aggressive or Restricted
Investment current asset investment
Policies policy
3. Moderate current assets
investment policy
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 1. Maturity Matching or
Alternative “Self-liquidating”
Current approach
Asset
Financing 2. Aggressive approach
Policies
3. Conservative
approach
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 The aggressive policy
called for the greatest
use of short-term debt,
Risk-return while the conservative
Tradeoff policy called for the
least. Maturity
matching fell in
between.
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