Working Capital Calculation

May 19th, 2015
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Aberystwyth University
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Any firm will have both Assets and Liabilities. These are classified on their duration, as short-term or “Current Assets” and long-term or “Fixed Assets”

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Working Capital ManagementCONCEPTAny firm will have both Assets and Liabilities. These are classifiedon their duration, as short-term or Current Assets and long-termor Fixed AssetsWorking Capital Management is Management of short-term assetsand liabilitiesThe Aim of Working Capital Management is to manage the firmsCurrent Assets and Current Liabilities in such a way that the levelof working capital is kept at optimal levels and the operations ofthe Company are not disruptedThe Net Working Capital (Current Assets Current Liabilities) willdetermine the firms Profitability and RiskBy Risk we mean the probability of firm becoming Technicallyinsolvent whereby it will be unable to meet its obligation when theyare due1Working Capital ManagementCONCEPTAppropriate Finance Mix which limits the risk and increasesprofits1.Aggressive Approach High Risk and High Profit MixLT Funds for Core/Fixed portion of current assetsTemp/seasonal needs financed by ST Funds2.Conservative Approach Low-Risk and Low-Profit MixLT Funds for Total Current AssetsST Funds resorted to for Emergencies onlyA Good Finance Manager has to trade off between the two2Working Capital ManagementCONCEPTIf you have insufficient working capital and try to increase sales, you can easilyover-stretch the financial resources of the business. This is called Over Trading.Early warning signs include :Pressure on existing cashExcept

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