Fundamentals of Financial Management, Third Edition

8

Working Capital Policy

OBJECTIVES

To describe what working capital actually means

To assess the factors influencing the size of current assets/working capital both in absolute terms and in relation to the fixed assets

To explain how current assets are financed — whether by short-term funds or by long-term funds or by both

The working capital provides the firm with liquidity, which is essential for the efficacious use of the fixed assets and, thereby, for achieving the expected rate of return. Any error in working capital decision may entail upon the desired liquidity and, thereby, on the efficient use of the fixed assets. It would not help gear up the firm to maximise corporate wealth. The emphasis in the present chapter thus lies on the ...