For Midterm Flashcards
concerns the determination of the optimal level, mix, and use of current assets and current liabilities.
Working Capital Finance
A company must maintain a level of working capital sufficient to pay bills as they come due. Failure to do so is
Technical insolvency and can result in involuntary bankruptcy
refers to the funds a company invests in its day-to-day operational activities and short-term assets.
Working Capital Investment
requires the determination of the appropriate mix in its components
Proper management of current assets
Proper management of current assets requires the determination of the appropriate mix in its components such as
Cash
marketable securities
accounts receivables
inventories considering safety
liquidity
profitability
The minimum level of current assets which the company needs to operate.
Permanent Current assets
are short-term assets that a company expects to convert into cash or use up within a relatively short period, usually within one operating cycle.
Temporary current assets
Types of financing policies
Moderate approach
Aggressive Approach
Conservative Approach
Hurdles to exact maturity matching Uncertainty about the lives of assets The use of common equity.
Financing policies
Common Equity has no Maturity
Financing Policies
In this approach, management keeps the investment in working capital at a minimum.
Aggressive Approach
Thus, a growing company would want to invest its funds in capital goods and not in idle assets.
Aggressive Approach
This policy maximizes return on investment at the price of the risk of minimal liquidity.
Aggressive Approach
Long term capital is used to finance all the permanent assets and to meet some of the seasonal needs
Conservative Approach
The firm uses a small amounts of short terms credit to meet its peak requirements, but it also meets part of its seasonal needs. “By sorting liquidity” In the form of marketable securities.
Conservative Approach
