1. Working capital refers to a company's current assets and current liabilities. It is important for day-to-day operations and affects risk, return, and share price. 2. There are two types of working capital: permanent working capital for minimum needs and temporary working capital that varies seasonally. 3. Managing working capital properly balances liquidity, profitability, and risk, with different strategies taking different approaches in financing current assets.

1. Working-Capital Management

9. Balance Sheet Current Liabilities Current Assets Long-Term Debt Preferred Stock Fixed Assets Common Stock Suppose we use long-term financing to finance some of our current assets . This strategy would be less risky , but more expensive!

10. Balance Sheet Current Liabilities Current Assets Long-Term Debt Preferred Stock Fixed Assets Common Stock Suppose we use current liabilities to finance some of our fixed assets . This strategy would be less expensive , but more risky!

11. Financing Current Assets: Short-Term and Long-Term Mix Spontaneous Financing : Trade credit, and other payables and accruals, that arise spontaneously in the firm’s day-to-day operations.

16. Effect of Alternative working capital policies A Rs. B Rs. C Rs. Sales 15,00,000 15,00,000 15,00,000 EBIT 1,50,000 1,50,000 1,50,000 Current Assets 5,00,000 4,00,000 3,00,000 Fixed Assets 5,00,000 5,00,000 5,00,000 Return on Total Asset (EBIT/Total Asset) 15% 16.67% 18.75% C. A / F. A 1.00 0.80 0.60 So B demonstrates a moderate policy and generate an average return which will be viable from the firms point of view.

21. The Operating Cycle and the Cash Cycle A firm’s operating cycle (OC) is the time from the beginning of the production process to collection of cash from the sale of the finished product. The operating cycle is the sum of the inventory period and the accounts receivable period, whereas the cash cycle is equal to the operating cycle less the accounts payable period. The Operating Cycle (OC) is the time between ordering materials and collecting cash from receivables.

22. Inventory conversion period, which is the average time required to convert materials into finished goods and then to sell those goods. If average inventories are 2,00,000 and sales are 10,00,000, then the inventory conversion period is 73 days: Inventory conversion period = __Inventory__ Sales per day = __2,00,000___ = 73 days 10,00,000/365

23. Receivables collection period, which is the average length of time required to convert the firm’s receivables into cash, that is, to collect cash following a sale. The receivables collection period is also called the days sales outstanding (DSO). If receivables are Rs.65754 and sales are Rs.10,00,000. The receivable collection period is Receivables collection period = ___Accounts receivable___ Average credit sales per day or Receivables collection period = DSO = Receivables Sales/365 = _65754__ = 24 days 10,00,000/365

24. Payables period, which is the average length of time between the purchase of materials and the payment of cash for them. If the firm on average has 30 days to pay for materials, if its cost of goods sold are 8,00,000 per year, and if its accounts payable average 65754 then its payables deferral period can be calculated as follows: Payables period = ____Payables____ Purchases per day = ______Payables_____ = __65754__ = 30 days purchases/365 8,00,000/365

25. The Operating Cycle Cash cycle = Operating cycle – Acco unts payable period Operating = cycle Inventory conversion + period Receivables collection period 73 days + 24 days =97

26. Cash Conversion Cycle Cash conversion cycle, the cash conversion cycle can be expressed by this equation: Days in Cash Conversion Cycle = 73 days + 24 days – 30 days = 67 days Cash Conversion = cycle Inventory conversion + period Receivables collection - period Payables deferral . period