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4. Understanding the Needs of the Business Long-Term Approach Short-Term Approach Choosing a Policy Approaches to Working Capital Financing Introduction to Working Capital > Approaches to Working Capital Financing Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_123&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. Sufficient working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term and long-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. When calculating working capital we think in terms of net working capital, which is calculated as current assets minus current liabilities. In any company, large or small, there is an inherent tradeoff between liquidity and profitability. Understanding the Needs of the Business Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-working-capital-17/approaches-to-working-capital-financing- 123/understanding-the-needs-of-the-business-503- 7070?campaign_content=book_192_section_123&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Inventory Software View on Boundless.com Introduction to Working Capital > Approaches to Working Capital Financing

6. The classification of assets as 'current' or 'non-current' may not be appropriate for describing the operations of a firm because different operations are classified together. Difficulties in working capital management can arise from the complexity of many business enterprises and the resultant inability to determine the length of the operating cycle. Working capital is a static concept, and debt-paying ability is dynamic. Therefore, working capital is not necessarily a good indication of the ability of the firm to pay current liabilities. Long-Term Approach Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-working-capital-17/approaches-to-working-capital-financing- 123/long-term-approach-504- 3828?campaign_content=book_192_section_123&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless The Operating Cycle View on Boundless.com Introduction to Working Capital > Approaches to Working Capital Financing

7. The main considerations for working capital are cash flow / liquidity and profitability / returns on capital. The most widely used measure of cash flow is the net operating cycle or cash conversion cycle. The cash conversion cycle measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. The aim of the study and calculation of the cash conversion cycle is to change the policies relating to credit purchase and credit sales. Short-Term Approach Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-working-capital-17/approaches-to-working-capital-financing- 123/short-term-approach-505- 3827?campaign_content=book_192_section_123&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Cash Conversion Cycle View on Boundless.com Introduction to Working Capital > Approaches to Working Capital Financing

8. Working capital policies aim at managing current assets - generally, cash and cash equivalents, inventories, and debtors - and short term financing, such that cash flows and returns are acceptable. One of the objectives within working capital management and general financing decisions is to match the maturity of liabilities with the life expectancy of assets. If the maturity of liabilities is less than the life expectancy of assets, a firm faces refinancing risk since it will have to raise new capital to pay off liabilities. Choosing a Policy Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-working-capital-17/approaches-to-working-capital-financing- 123/choosing-a-policy-506- 5153?campaign_content=book_192_section_123&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Policies Regarding Liquidity View on Boundless.com Introduction to Working Capital > Approaches to Working Capital Financing

9. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

10. Key terms credit policy Credit terms given to customers that affect sales and collection practices. discounting The process of finding the present value using the discount rate. inventory The stock of an item on hand at a particular location or business service industry An industry that does not produce any goods, but only provides a service such as a bank or insurance company. static Fixed in place. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital

11. Policies Regarding Liquidity This chart lays out sample working capital issues and some possible solutions. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikispaces. "IB2-Business-p4 - 3.3 Working Capital." CC BY-SA http://ib2-business-p4.wikispaces.com/3.3+Working+Capital View on Boundless.comCC BY-SAhttp://ib2-business-p4.wikispaces.com/3.3+Working+CapitalView on Boundless.com Introduction to Working Capital

12. Cash Conversion Cycle Above is a chart showing a sample cash conversion cycle. Free to share, print, make copies and changes. Get yours at www.boundless.com University of Texas. "Working Capital Management: A Must for Any Startup | Texas Enterprise." CC BY-SA http://www.texasenterprise.utexas.edu/article/working- capital-management-must-any-startup View on Boundless.comCC BY-SAhttp://www.texasenterprise.utexas.edu/article/working- capital-management-must-any-startupView on Boundless.com Introduction to Working Capital

13. Inventory Software This is an example of modern inventory software that enables managers to precisely track orders and inventory levels. Free to share, print, make copies and changes. Get yours at www.boundless.com Flickr. "All sizes | JDE.Workbench Search | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/oracle_images/5006231178/sizes/m/in/photostream/ View on Boundless.comCC BYhttp://www.flickr.com/photos/oracle_images/5006231178/sizes/m/in/photostream/View on Boundless.com Introduction to Working Capital

14. The Operating Cycle Above is a flow chart for a sample operating cycle for a firm. Free to share, print, make copies and changes. Get yours at www.boundless.com Flickr. "y2cary3n6mng-u6yp2j-the-operating-cycle | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/sampjb/7690685914/ View on Boundless.comCC BY-SAhttp://www.flickr.com/photos/sampjb/7690685914/View on Boundless.com Introduction to Working Capital

15. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital Which of the following factors need to be considered evaluating a company's working capital strategy? A) The level of inventory necessary to ensure that a company can meet its customers demands. B) All of these answers. C) The number of days it takes a business to obtain payment from its customers for its completed sales. D) The number of days the company can wait before it must pay its debts.

16. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Working Capital Which of the following factors need to be considered evaluating a company's working capital strategy? A) The level of inventory necessary to ensure that a company can meet its customers demands. B) All of these answers. C) The number of days it takes a business to obtain payment from its customers for its completed sales. D) The number of days the company can wait before it must pay its debts.

17. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital Which of the following explains why working capital may not be a pure measure of short-term assets and liabilities? A) The distinction between "current" and "non-current" is arbitrary. B) Many businesses are complex, making it difficult to determine the length of the operating cycle. C) All of these answers. D) Cash flows available for paying current liabilities may be closely related to long-term assets.

18. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Working Capital Which of the following explains why working capital may not be a pure measure of short-term assets and liabilities? A) The distinction between "current" and "non-current" is arbitrary. B) Many businesses are complex, making it difficult to determine the length of the operating cycle. C) All of these answers. D) Cash flows available for paying current liabilities may be closely related to long-term assets.

19. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital Which of the following statements regarding the cash conversion cycle is correct? A) A firm can achieve and sustain a negative cash conversion cycle. B) The cash conversion cycle measures a company's credit risk associated with growth. C) All of these answers. D) The cash conversion cycle can be shortened by delaying payments to suppliers.

20. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Working Capital Which of the following statements regarding the cash conversion cycle is correct? A) A firm can achieve and sustain a negative cash conversion cycle. B) The cash conversion cycle measures a company's credit risk associated with growth. C) All of these answers. D) The cash conversion cycle can be shortened by delaying payments to suppliers.

21. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital Which of the following statements regarding refinancing risk is correct? A) Generally, liabilities should be self-liquidating. B) If liabilities mature after the life of the assets, there won't be sufficient working capital. C) A company should always closely match its liabilities to its assets. D) All of these answers.

22. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Working Capital Which of the following statements regarding refinancing risk is correct? A) Generally, liabilities should be self-liquidating. B) If liabilities mature after the life of the assets, there won't be sufficient working capital. C) A company should always closely match its liabilities to its assets. D) All of these answers.

23. Attribution Wikipedia. "Corporate finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_finance#Working_capital_managementCC BY-SA 3.0http://en.wikipedia.org/wiki/Corporate_finance#Working_capital_management Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/discounting--2CC BY-SA 3.0http://www.boundless.com//finance/definition/discounting--2 Wikipedia. "Cash conversion cycle." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_conversion_cycleCC BY-SA 3.0http://en.wikipedia.org/wiki/Cash_conversion_cycle Wikispaces. "SU3FINANCE - Chapter 19 - Short-Term Financial Planning." CC BY-SA http://su3finance.wikispaces.com/Chapter+19+-+Short-Term+Financial+PlanningCC BY-SA http://su3finance.wikispaces.com/Chapter+19+-+Short-Term+Financial+Planning Vanbreda. "thry13:classification [michael]." Public domain http://michael.vanbreda.org/doku.php?id=thry13:classificationPublic domainhttp://michael.vanbreda.org/doku.php?id=thry13:classification Wiktionary. "static." CC BY-SA 3.0 http://en.wiktionary.org/wiki/staticCC BY-SA 3.0http://en.wiktionary.org/wiki/static Wiktionary. "service industry." CC BY-SA 3.0 http://en.wiktionary.org/wiki/service+industryCC BY-SA 3.0http://en.wiktionary.org/wiki/service+industry Wikipedia. "Corporate finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_financeCC BY-SA 3.0http://en.wikipedia.org/wiki/Corporate_finance Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/credit-policyCC BY-SA 3.0http://www.boundless.com//finance/definition/credit-policy OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view University of Texas. "Working Capital Management: A Must for Any Startup | Texas Enterprise." CC BY-SA http://www.texasenterprise.utexas.edu/article/working-capital-management-must-any-startupCC BY-SA http://www.texasenterprise.utexas.edu/article/working-capital-management-must-any-startup Wikipedia. "Working capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Working_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Working_capital Wiktionary. "inventory." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inventoryCC BY-SA 3.0http://en.wiktionary.org/wiki/inventory Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Working Capital