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Home » Finance Homework Help » Working Capital Principles
Working Capital Principles
The main objective of this particular aspect of finance is to underline the Working capital elements and highlights their utility and compose their work by which they are contributed their achievements in financial management. Working capital utilizes the need for investing in current assets, and elaborates the concept of operating cycle. It also highlights the necessity of managing current assets and current liabilities and explains the principles of current asset investment and financing. Working capital management focuses on the proper mix of short-term and long-term financing for current assets.

In this part, issues relating to the management of the current assets will be discussed. The management of current assets is similar to that of fixed assets in the sense that in both cases a firm analyses their effects on its return and risks. The management of fixed and current assets, however, differs in three important ways: first, in managing fixed assets, time is a very important factor; consequently, discounting and compounding techniques play a significant role in capital budgeting and a minor one in the management of current assets. Second, the large holding of current assets, especially cash, strengthens the firm’s liquidity position (and reduces riskiness), but also reduces the overall profitability. Thus, a risk return trade off is involved in holding current assets. Thirdly, levels of fixed as well as current assets which depend upon expected sales fluctuations in the short run. Thus, the firm has a greater degree of flexibility in managing current assets.

Some of its main topics are:

1. Capital and liquidity management
2. Cash conversion cycle
3. Estimating working capital
4. Policies for financing current assets
5. Working capital

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