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Summary Working Capital Management
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Summary of 5 pages for the course Corporate Financial Management at UCT (Complete summary)
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MODULE 3: WORKING CAPITAL MANAGEMENTGross Working Capital: the firm’s investment in current assets to generate profits
Net Working Capital: current assets – current liabilities, i.e. a measure of liquidity
Working Capital Management: the administration and management of the firm’s current
assets and the financing needed to support current assets
Working Capital Cycle/Cash Conversion Cycle
WCC = DIOH + ARD - APD
Inventory x 365 Debtors x 365 Creditors x 365
+ -
Cost of Sales expense Credit Sales Cost of Sales expense
Working Capital Cycle
Time between cash payments made for inventory, materials and cash received
from debtors for credit sales
How long businesses finance debtors
Negative WCC: creditors are paid AFTER receiving money from debtors (creditors
are financing some of the business’ assets)
Positive WCC: creditors are paid BEFORE receiving money from debtors (business is
financing some of their debtors’ assets)
Working Capital Policies
AGGRESSIVE/RESTRICTIVE CONSERVATIVE/FLEXIBLE
RETURN Highest return Least return
RISK Highest risk Least risk
CURRENT Less invested in inventory and High investment in inventory and
ASSETS accounts receivable accounts receivable
FINANCING Larger proportion of short-term Larger proportion of long-term
financing used financing used
DEBTORS Offered more stricter terms Terms are more relaxed
Sources of Risk
FIRM SPECIFIC RISK Business risk Possibility that firm will be unable to
cover operating expenses
Financial risk Firm will be unable to meet regular
interest payments and instalments
Interest rate risk A change in the interest rate could
SHAREHOLDER SPECIFIC RISK negatively affect investments
Liquidity risk Investment cannot be sold at a
reasonable price
Market risk Investment value could decrease
due to economic, political, social
or legal events
Event risk Unexpected events could impact
FIRM AND firm or investment value
SHAREHOLDER RISKS Exchange rate risk Future cash flows can be
influenced by exchange rate risk
Purchase power risk Change in inflation/deflation will
decrease investment cash flows
and value
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