Financial Management: Summary and Definitions.

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Financial Management: Summary and Definitions
Analysis of ch16:
Working capital management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. This chapter discusses the management of current assets, particularly cash, marketable securities, inventory, and receivables. This chapter answers some Basic questions involving working capital management
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Short-term financing involves speed, flexibility and lower cost than long-term debt. A lower cost is present because of a lower amount of interest payments. However, it has fluctuating interest expense and firm may be at risk of default as a result of temporary economic conditions.
Overall this chapter was very important as it showed the importance of efficient working capital management for a firm. A corporation should include the information provided in order to run an efficient business.
DEFINITIONS
Working capital: all short term or current assets, such as, cash, inventories and Account receivables. 1. Net working capital: current assets minus all current liabilities. 2. Net operating working capital: current assets minus noninterest bearing current liabilities. 3. Cash conversion cycle: the length of time funds are tied up in working capital or the length of time between paying for working capital and collecting cash from the sale of working capital. 4. Inventory conversion period: average time required to convert raw materials in to finished goods and then to sell to them. 5. Average collection period: the average length of time required to convert the firm’s receivables into cash. 6. Payables deferral period: the average length of time between the purchase of materials and labor and the payment of cash for them. 7. Relaxed current asset investment policy: relatively large amounts of cash, marketable securities and inventories are

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