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FINANCIMG WORKING CAPITAL

Support its everyday operations

Invest in inventory and it must sale goods or service on credit

Holding inventory and selling on credit cost money

Bankoverdraft-Short-term

Working Capital Long term

OBJECTIVE OF WORKING CAPITAL

Investing in working capital is not excessive-Equity/Debt

Ensuring that enough working capital is available to support operating activities---

to pay supplies, to avoid liquidity problems

CONFLICTING OF OBJECTIVES WITH WORKING CAPITAL

MANAGEMENT

Over investment should be avoided as it reduces profits or returns for

shareholders

Under investment should be avoided as it creates Liquidity problems

INVESTMENT IN WORKING CAPITAL

Should not be too high, with excessive inventories and trade

receivables. If it is too high it cost the entity because it is without

benefit

Should not be too low------Bank draft / Credit supplier

The amount to invest in Working capital depends on two things1. Benefits of having sufficient finance to support trading operations without

excessive liquidity risk

2. The cost of financing working capital

BENEFITS ON INVESTMENT IN WORKING CAPITAL

i. Holding inventories allows customer to be supplied in demand

ii. Entities are expected to sell their goods to customer on creditiii. It is useful to have some cash to meet demands for immediate

payments

DISADVANTAGES ON INVESTMENT IN WORKING CAPITAL

i. It cost the entity hence money has just been tied in inventories

ii. Current accounts does not earn nothing

DETERMING THE LEVEL OF WORKING CAPITAL

The target level of working capital investment in an organization is a policy decision

which is dependent on several factors including:

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1. The length of the working capital cycle

2. Management attitude

THE LENGTH OF THE WORKING CAPITAL CYCLE

Different industries will have different working capital requirements.

-The working capital cycle measure the time taken from payment made to supplier of lawmaterials to the payments received from customer.

-In manufacturing company this will include the time

1) Raw materials are held in inventory before they are used in production2) The product takes in the production process

3) Finished goods are held in inventory before being purchased by a customer.

Working cycle in manufacturing is long

Working capital cycle in Retailing is short

MANAGEMENT ATTITUDE TO RISK

1. An aggressive Working Capital policy will seek to keep working capital toa minimum-Low finished stock-

Consequence- Stock run out- Supplier may un willing to supply us withgoods

2. A conservative working capital policy aims adequate working capital for

organization needs. This will results in generous term to customer whichwill attracts many.