| Financial management decisions are divided into | | | | be repaid after each trip to demonstrate to the |
| the management of assets (investments) and | | | | bank that the credit was sound. If the peddler |
| liabilities (sources of financing), in the long-term and | | | | was able to repay the loan, then the bank would |
| the short-term. It is common knowledge that a | | | | issue another loan, and these were sound banking |
| firm's value cannot be maximized in the long run | | | | practices. The days of the Yankee peddler have |
| unless it survives the short run. Firms fail most | | | | long since pasted, but the importance of working |
| often because they are unable to meet their | | | | capital remains. Current asset management and |
| working capital needs; consequently, sound | | | | short-term financing are still the two basic |
| working capital management is a requisite for firm | | | | elements of working capital and a daily headache |
| survival. | | | | for the financial managers. |
| About 60 percent of a financial manager's time is | | | | Working capital, sometimes called gross working |
| devoted to working capital management, and | | | | capital, simply refers to the firm's total current |
| many of the potential employees in | | | | assets (the short-term ones), cash, marketable |
| finance-related fields will find out that their first | | | | securities, accounts receivable, and inventory. |
| assignment on the job will involve working capital. | | | | While long-term financial analysis primarily concerns |
| For these reasons, working capital policy and | | | | strategic planning, working capital management |
| management is an essential topic of study. In | | | | deals with day-to-day operations. By making sure |
| many text books working capital refers to | | | | that production lines do not stop due to lack of |
| current assets, and net working capital is defined | | | | raw materials, that inventories do not build up |
| as current assets minus current liabilities. Working | | | | because production continues unchanged when |
| capital policy refers to decisions relating to the | | | | sales dip, that customers pay on time and that |
| level of current assets and the way they are | | | | enough cash is on hand to make payments when |
| financed, while working capital management refers | | | | they are due. Obviously without good working |
| to all those decisions and activities a firm | | | | capital management, no firm can be efficient and |
| undertakes in order to manage efficiently the | | | | profitable. |
| elements of current assets. | | | | Statements about the flexibility, cost, and |
| The term working capital originated with the old | | | | riskiness of short-term debt versus long-term |
| Yankee peddler, who would load up his wagon | | | | debt depend, to a large extent, on the type of |
| with goods and then go off on his route to peddle | | | | short-term credit that actually is used. Short-term |
| his wares. The merchandise was called working | | | | credit is defined as any liability originally scheduled |
| capital because it was what he actually sold, or | | | | for payment within one year. There are |
| "turned over", to produce his profits. The wagon | | | | numerous sources of short-term funds, such as |
| and horse were his fixed assets. He generally | | | | accruals, accounts payable (trade credit), bank |
| owned the horse and wagon, so they were | | | | loans, and commercial paper. The major elements |
| financed with "equity" capital, but he borrowed the | | | | of current liabilities are trade creditors and bank |
| funds to buy the merchandise. These borrowings | | | | overdrafts, and these are further analyzed. |
| were called working capital loans, and they had to | | | | |