working capital

Examples of working capital in the following topics:

• Calculating Expected Value

  • Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.
  • Net working capital 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. "
  • We can find working capital by:
  • The common commercial definition of working capital for the purpose of a working capital adjustment in a mergers and acquisitions transaction (i.e., for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:

• Decision Criteria

  • The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
  • Working capital is the amount of capital which is readily available to an organization.
  • Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
  • Another factor affecting working capital management is credit policy of the firm.
  • Cash conversion cycle is a main criteria for working capital management.

• Working Capital

  • Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
  • Net working capital 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.
  • Decisions relating to working capital and short-term financing are referred to as working capital management.
  • The management of working capital involves managing inventories, accounts receivable and payable, and cash.

• Understanding the Needs of the Business

  • Working capital is considered a part of operating capital along with fixed assets, such as plant and equipment.
  • However, too much working capital can carry with it a higher cost of capital.
  • When calculating working capital, we think in terms of net working capital, which 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.
  • Describe the goals of a business in the context of ts working capital needs

• Short-Term Approach

  • Decisions relating to working capital are usually short-term, since it is the difference between current assets and current liabilities.
  • Working capital is the amount of capital that is readily available to an organization.
  • As a result, the decisions relating to working capital are almost always current, i.e., short term, decisions.
  • In other words, working capital management differs from capital investment decisions - specifically in terms of discounting and profitability.
  • Working capital management applies different criteria in decision making.

• Calculating Working Capital

  • Working capital (WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity.
  • Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.

• Evaluating Interest Rates

  • The management of working capital takes place in the realm of short-term decision-making.
  • The interest rate most commonly used in working capital management is the cost of capital.
  • Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions.
  • As mentioned, working capital decisions are made with the short-term in mind.
  • Interest rates of working capital financing can be largely affected by discount rate, WACC and cost of capital.

• Identifying Varying Conditions

  • Management uses policies and techniques for the management of working capital such as cash, inventory, debtors and short term financing.
  • Decisions relating to working capital and short-term financing are referred to as working capital management.
  • The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
  • Management will use a combination of policies and techniques for the management of working capital.
  • Identify the four main areas of variability of working capital management

• Choosing a Policy

  • A firm will use a combination of policies for managing working capital, focusing on cash flow, liquidity, profitability, and capital return.
  • Guided by criteria measuring cash flow, liquidity, profitability, and return on capital, the management of a firm will use a combination of policies and techniques for the management of working capital.
  • A final area management should be concerned with when deciding on a working capital policy is short-term financing.
  • If the maturity of liabilities is longer than the life expectancy of assets, then there should be sufficient working capital available to pay off debts.
  • This chart lays out sample working capital issues and some possible solutions.

• Free Cash Flow

  • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
  • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
  • Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
  • Cash flows from operations = Earnings before Interest and Tax x (1-Tax rate) + Depreciation & Amortization - Changes in Working Capital
  • The second difference is that the free cash flow measurement deducts increases in net working capital, where the net income approach does not.