İŞLETME FİNANSI I

Net Working Capital refers to the difference between the current assets and the current liabilities. Net working capital is a measure of company’s liquidity and ability to survive in case the only funding source is current assets.

Outstanding expenses are current liabilities. The other options are current assets.

Working capital management has the following four dimensions:

The working capital policy of a company should focus on maintaining sufficient liquidity. It is a fact that in ideal cases, companies determine their optimal working capital level and also their funding strategy in order to create value. In this regard, the decision makers should decide about not only the amount of current assets but also the proportions of short-term and long-term sources for financing these current assets.

Aggressive policy, as the name suggests, is specified as the most risky working capital financing policy as a higher proportion of current assets including permanent ones is financed by the short-term debt. To apply such a policy, the company should ensure that the receivables are supposed to be collected on time and payments to the creditors are easily made as late as possible.

There four types of inventory costs:

There ara four types of costs ncurred in the course of receivables management:

Transaction costs are the costs incurred in getting the marketable securities converted into cash or vice versa.

Danger level is the level below the minimum level. It leads to stoppage of the production process. It is calculated as the formula below:

Danger Level = (Average Consumption)x(Maximum reorder period for emergency purchase)

The main source of financing secured internally has been by means of Accruals. The major accrual items are wages and taxes which in turn create obligations to payments to the employees and to the government.

The gross working capital refers to the total current asset holdings of a company which can be converted into cash in less than a year time. The current assets include but are not limited to cash, cash in banks, marketable securities, receivables with a term less than 1 year which are mainly from clients, but also from others, inventory of raw materials, work-in-progress, finished goods, and prepayments received.

The permanent working capital represents the minimum level of investment in the current assets that is carried by the business at all times to carry out its activities.

The important factors in determining the amount of the working capital are:

Length of period of manufacture

Volume of business

The proportion of the cost of raw materials to total cost

Use of manual labor or mechanization

Inventory level for raw materials of finished goods

Turnover of working capital

Terms of credit

Short term financing options

Seasonality of product demand

Price level changes

Credibility: Working capital management has great significance for all companies, but it is more critical for smaller companies which have more restricted funding capabilities.

Hedging policy, which is also named as matching policy, proposes a strategy by which the fluctuating part of the current assets are financed by the current liabilities. Consequently, the fixed and permanent current assets are financed through long-term sources.

The length of the company’s operating and cash conversion cycles determines the level of liquidity.

Inventories can be classified into five major categories:

- Raw Material: It is the basic and the most important part of inventories. These are goods directly or used in the production process, and the expenses incurred for the procurement of raw materials are reflected to the cost per unit of product.

- Work in Progress: These include those materials which have been committed to production process but have not yet been completed.

- Consumables: These are the materials which are needed for smooth running of the manufacturing process.

- Finished Goods: These are the final output of the production process.

- Spares: It is also a part of inventories, which includes small spares and parts.

Capital Cost: It is a fact that selling on credit creates a financing requirement for the company for the period between the date of sale of goods to the customer and the date of payment made by the customer as it should keep making payments to the employees, suppliers of raw materials, etc. Thus, a company in the course of expanding sales through receivables incurs additional capital costs.

The main source of financing secured internally has been by means of Accruals. The major accrual items are wages and taxes which in turn create obligations to payments to the employees and to the government.