10-07-2012, 12:58 PM
AFM study note
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What is Working capital?
o In simple terms it is Current Assets minus Current Liabilities
o We have to look at Working Capital Management from a cash flow perspective also.
o In a cash flow statement, there are two groups based on time factor (Short term and Long Term) and three groups on type of activity (Operating, Investing and Financing activities). We have to see the combined effect of both.
o Working Capital management becomes critical when there is a mismatch between working capital requirement and the actual cash flow.
o This is one reason we have to study the working capital cycle in detail for all the components therein.
Cash Management
Motives for holding cash
Transaction Motive
o Buffer due to unsynchronizied receipts and payment cycles (Planned)
Precautionary Motive
o Buffer to protect disparity between actual receipts and payments (Projected or simulated)
Speculative Motive
o To take advantages of market developments on raw material price, foreign exchange rate, etc.
Establish reliable forecasting and reporting systems
Improve cash collections and disbursements
Achieve optimal conservation and utilization of funds