Working Capital Management Quiz: Test Your Knowledge on WCM

Questions and Answers

To manage short-term financial obligations

Financial and accounting views

Efficient utilization of working capital

Cash, marketable securities, receivables, inventories, and prepayments Signup and view all the answers

Assets required to support fluctuations in activity levels Signup and view all the answers

It is required for short-term operations Signup and view all the answers

Maximize profitability Signup and view all the answers

Within 1 year or normal operating cycle Signup and view all the answers

Trade payables, accrued expenses, short-term debts, and current portion of long-term debts Signup and view all the answers

It is required for short-term operations and long-term survival Signup and view all the answers

Study Notes

WCM involves managing a company's liquidity by managing current assets and liabilities.
It covers both setting the working capital policy and carrying it out in daily operations.

Refers to the basic decisions regarding target levels for each category of current assets and how current assets will be financed.
There are two kinds of working capital policies:

Relaxed Current Investment Policy
- Carries a relatively large amount of current assets.
- Stimulates sales by liberated credit policy, resulting in a high level of receivables.
- The firm carries a large amount of inventory.
Restricted Current Investment Policy
- Minimizes current assets.
- Implements tight credit policy, which may result in losing sales.
- Holds minimal safety stock of cash and inventory, and works out the highest current asset turnover.

Primary consideration is the trade-off between risk (liquidity) and return (profitability) associated with:
- Asset mix decision (current and non-current assets)
- Financing mix decision (short-term and long-term debts to finance current assets)

Cash management involves maintaining cash and marketable securities (MS) investment levels.
Main objective: attain the optimum cash balance that balances liquidity and profitability.

Transactional motive: to facilitate normal transactions of the business.
Contractual motive: to meet bank (creditor) requirements contained in a financing agreement.

Amount of current assets (financial management view) or current assets net of current liabilities (accounting view) used to finance the firm's short-term operations.
Includes cash, marketable securities, receivables, inventories, and prepayments.
Temporary current assets support fluctuations of the firm's level of activity.
Permanent current assets maintain normal operations.
Current liabilities: obligations to be paid within 1 year, through current assets or incurrence of another liability.