Page 18 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 1: Introduction to Working Capital Management

Along with fixed assets such as plant and equipment, working capital is considered a part Notes
of operating capital.

It is calculated as current assets minus current liabilities.
If current assets are less than current liabilities, an entity has a working capital deficiency,
also called a working capital deficit.

Working capital represents the funds available with the company for day-to-day operations.
Working capital finances the cash conversion cycle.
Company cannot survive with negative working capital which represents that the company
has no funds for day-to-day operations.

Some of the factors that can affect a firm’s working capital level are type/nature of business,
volume of sales, seasonality and lengths of operating and cash cycle.

1.8 Keywords

Cost of Sales: Cost of sales is equal to the difference between the sales and the gross profit.
Current Assets: Current assets are cash and other assets expected to be converted to cash, sold, or
consumed either in a year or in the operating cycle, without disturbing the normal operations of
a business.
Current Liabilities: A company’s debts or obligations due within one year.
Working Capital: It means the firm’s holdings of current or short-term asset.

1.9 Review Questions

1. Which portion of funds would the current liabilities constitute in a firm?
2. What might happen if the current liabilities of a firm are larger than the current assets it
has? What will be its effect on the working of the firm?

3. Under Aggressive working capital policy, investment in current assets is very low.
Comment.
4. What will be the consequences of conservative working capital policy?

5. In your opinion, what does the risk increases with – maturity or short-term debt and why?
6. According to you, which would be larger – long-term interest rates or short-term interest
rates and why?

7. Why does every company vying to create competitive advantages in the market?
8. A firm’s net working capital position not only is important from an internal standpoint; it
also is widely used as one measure of the firm’s risk. Justify this statement.

9. What do you think as the reason for the public utility undertakings needing very limited
working capital?
10. Do you think that an adequate working capital enables a firm to exploit of favourable
market conditions? Support your answer with proper reasons.
11. A firm’s net working capital is sometimes defined as the portion of current assets financed
with long-term funds, can you show diagrammatically why this definition is valid?

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