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Management
- refers to the efficient and effective
utilization of working capital to attain
predetermined objectives of an organization.
- administration and control of current
assets and current liabilities to maximize a
firm’s value thru balancing between balance
and risk.
Analysis of Working Capital
1. Appropriate Level of Working Capital
- refers to the adequacy thereof to enable
a business entity to operate efficiently towards
the attainment of objectives.
2. Structural Health of working capital
- refers to how much is in cash,
receivables, inventories, etc, and the ability of
the business organization to meet financial
requirements.
Analysis of Working Capital
3. Circulation of Working Capital
- refers to the flow thereof from one
current asset item to another in the process of
conducting operations and the rate of such flow.
4. Liquidity of Working Capital
- give emphasis on cash and
marketable securities and how soon the noncash
items among the current assets be converted into
cash.
Financing Requirements of a Firm
1. Permanent Financing Requirement
2. Seasonal Financing Requirement
Total Financing Requirement = Permanent Financing
Requirement + Temporary Requirement
= (Fixed Assets + Permanent Current Assets) +
Temporary Current Assets.
Example:
The permanent requirement financing of DGC Corp. is
80,000 consisting of fixed assets (50,000) and current
assets (30,000). Because of seasonal changes in the
demand for its product, the total current assets for the
first, second, third and fourth quarter 0f 19B have been
estimated at 80,000, 45,000, 30,000 and 42, 000
respectively
Throughout the year, the total financing
requirement is 80,000 with additional
financing requirement of 8,000, 15,000 and 12,
000 for the first, second and fourth quarters,
respectively.
1. Aggressive Financing Strategy
- operations are conducted on a minimum
amount of working capital.
- bases of long term is the lowest amount
Example:
Applying the aggressive financing strategy in the
given example the permanent financing requirement of
80,000 must be from long term sources with temporary
financing requirements (ranging from 0 to 15,000. under
this strategy working capital is 30,000 only.
1 2 3 4 5
Total Long Short Working Excess
Require term Term Capital Working
ment Funds Funds (2) –( FA) Capital
(FA + (1) –( 2) (4) –( CA)
CA)
Example:
A corp. maintains its inventory at a level equal to 15 days’
sales. This means that on the average, goods purchased remain
in the form of inventory for 15 days before they are sold. Cost
of sales amount to 468,000 per annum so that its inventory
must be 19,500 (that is 468,000/360 days x 15 days). Should the
company decide to reduce inventory level to take care of 12
days’ sales ( or reduce it by 3 days’ sales) the decrease in
inventory must be equal to 3, 900 computed as follows:
Solutions:
No. of Orders 12 10 8
Order Size (annual usage/no. of 883 1,060 1,325
orders
Average inventory (order size/2) 442 530 662
Ordering cost(No. of orders x 15.90) 191 159 127
Carrying Cost (Ave. Invty. X .30) 133 159 199
Total Relevant Cost 324 318 326
Graphical Representation of
Relevant Cost in EOQ Determination
Total Cost
P
Carrying Cost
Minimum
Cost
Ordering cost
Usages during
lead time Frequency Safety % Risk %
10 8 8% 92
25 25 33% 67
35 40 73% 27
45 20 93% 7
56 7 100% 0
100