Aspects and Elements Related to Working Capital Management

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Aspects and elements related to
Working Capital Management

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Prepared by: Ahmed O. Sultan

- An important responsibility of the financial manager is overseeing the firm 's day to day financial activities. This area of finance known as Working capital management, is concerned with management of the firm 's current accounts to achieve his goal which is the balance between profit and risk that maximizes the firm 's value by managing each of the firm 's current assets (Cash, Marketable securities, Accounts receivables and Inventories) and current liabilities represent the firm 's short term financing.¹

- Net Working Capital: is defined as
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3) Moderate Current Asset Investment Policy - A policy that is between the relaxed and restricted policies.

Managing the Components of Working Capital - There are four main components:-

← Cash and Marketable Security Management: - The Reasons of holding cash

1. Transaction Balance is a cash balance necessary for day to day operations 2. Compensation Balance is a bank balance that a firm must maintain to compensate the bank of services rendered or for granting a loan. 3. Pre-cautionary Balance is a cash balance held in reserve for random, unforeseen fluctuations in cash inflows and outflows. 4. Speculative Balance is a cash balance that is held to enable the firm to take advantage of any bargain purchases that might arise.² ----------------------------------------------------------------------------------------------
¹ Lawrence J. Gitman; 'Principals of the Managerial Finance '; Eighth edition; P.741-2
² Eugene F. Brigham; Joel F. Houston; ' 'Fundamentals of Financial Management ' '; Fourth edition; P.554-559

- Advantage of Holding Adequate Cash or Marketable Securities: is for taking trade discount, help the firm to maintain its credit rating, for taking an advantage of favorable business opportunities or to
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