2. Working Capital
“Financial Management; Theory and Practice. 13ed” (Brigham & Ehrhard,
2011) - Chapter 16 states -
“Working Capital, sometimes called gross working capital,
simply refers to current assets used in 0perations”
Translation
Working Capital refers to the assets and organization uses to
develop, test, and distribute their products and services.
In essence, Working Capital is what keeps operating departments within an organization
functioning. In order to maintain leverage within the infrastructure, managers must
benchmark current working capital usage and financing methods with other organizations
in the industry. Managers use the results of these analysis to determine if they are receiving
the benefit desired or if they must decide on efficiency alterations, financing options, how
much cash to keep on hand, and to what level the organization can expand to meet
shareholder expectations and customer demands.
3. Operational Needs and Short Term
Financing
Methodologies
Credit Policy – AKA – Accounts Receivable
“Current Asset Investment” policies have three categories – relaxed, restricted and moderate.
Relaxed polices can leave a company with low Return on Common Equity or ROE, however a
more restricted line of credit policy might bring in a better ROE, it may inhibit the greater
population from even attempting to access credit. Many companies will choose a moderate
policy as it offers the most attractive rates for consumers, however it allows the company to
ensure that their ROE is some what intact.
ROE= Profit margin x Total asset turnover x Equity Multiplier
= Net Income/sales x Sales/Assets x Assets /Equity
(Brigham & Ehrhard, 2011)
4. Operational Needs and Short Term
Financing
Alternative Methodologies
Maturity Matching or “Self – Liquidating” Approach
This approach establishes that all fixed assets and permanent operating assets are
financed with “long term capital” however, current assets are financed with short term
debt (i.e. inventories, accounts payable, credit from suppliers)
Aggressive Approach
(Brigham & Ehrhard, 2011)