2. Working CapitalFinancial Management; Theory and Practice.
13ed (Brigham & Ehrhard,2011) - Chapter 16 states -Working
Capital, sometimes called gross working capital,simply refers to
current assets used in 0perationsTranslationWorking Capital refers
to the assets and organization uses todevelop, test, and distribute
their products and services.In essence, Working Capital is what
keeps operating departments within an organizationfunctioning. In
order to maintain leverage within the infrastructure, managers
mustbenchmark current working capital usage and financing methods
with other organizationsin the industry. Managers use the results
of these analysis to determine if they are receivingthe benefit
desired or if they must decide on efficiency alterations, financing
options, howmuch cash to keep on hand, and to what level the
organization can expand to meetshareholder expectations and
customer demands.
3. Operational Needs and Short TermFinancingMethodologiesCredit
Policy AKA Accounts ReceivableCurrent Asset Investment policies
have three categories relaxed, restricted and moderate.Relaxed
polices can leave a company with low Return on Common Equity or
ROE, however amore restricted line of credit policy might bring in
a better ROE, it may inhibit the greaterpopulation from even
attempting to access credit. Many companies will choose a
moderatepolicy as it offers the most attractive rates for
consumers, however it allows the company toensure that their ROE is
some what intact.ROE= Profit margin x Total asset turnover x Equity
Multiplier= Net Income/sales x Sales/Assets x Assets
/Equity(Brigham & Ehrhard, 2011)
4. Operational Needs and Short TermFinancingAlternative
MethodologiesMaturity Matching or Self Liquidating ApproachThis
approach establishes that all fixed assets and permanent operating
assets arefinanced with long term capital however, current assets
are financed with short termdebt (i.e. inventories, accounts
payable, credit from suppliers)Aggressive Approach(Brigham &
Ehrhard, 2011)
