WORKING

-the
capital
of
a
business
that
is
CAPITAL
used in its
day-to-day trading operations,
calculated as the current assets
minus the current liabilities.

The need for working capital

1. Replenishment of Inventory----a sufficient stock of
inventory is required to support the sales target
of the firm.
2. Provision for operating expenses----to maintain the
operations of the firm on a day-to-day basis.
3. Support for credit sales----at times, conditions
require that credit sales be extended to the firms
clients.
4. Provision of a safety margin----The firm should
have sufficients amount of capital to provide for
unexpected expenditures.

Cash requirements

- The firm needs cash to pay expenditures that arise

from time to time. Even if the anticipated cash receipts
is equal to the anticipated cash expenditures.

e amount of the firms purchases and cash sales.

e time period for which the firm receives and grants credit
e time period from the dates of purchase of raw materials
payment of wages to the dates of cash receipts from sale
e amount of cash to be used for investment in inventories.
e amount of cash needed for other purposes such as cash
dividends.

nventory requirements

the production of large stocks of inventory generate savings as a result of lowe

roduction cost. It will also provide the firm with large quantity of stocks to meet
ncreasing or unusually large orders from customers.

Management of working capital

working capital must always be able to cover fund requirements of the compa
hey a needed. There are times when unusual pressures on working capital makes
f the finance managervery diffivult.

.
.
.
.

Adequate
Liquid
Conserved
Used in the attainment of the profit objectives.

Liquidity management

it refers to the ability of the firm to pay it bills on time or otherwise meet its cu
Obligation.

Cash sales
Collection of accounts receivables
Loans
Sales of assets
Ownership contribuiton
Advances from customers

ing and quantifying the liquidity reserve needs or th

ms are faced with a number of uncertainties and contingencies which may require
s. To be protected against the worst possibilities, a very large reserve of cash will

fication of contingencies requiring protection

ssment of the probabilities of the contingencies occurring.
ssment of the probabilities of the contingencies occurring at the same time
ssment of the probable amount of cash required if each of the contingencies hap

opment of alternative sources of liquidity

e the liquidity reserve needs of the firm have been defined and quantified altern
of meeting these needs should be identified and evaluated.