What is the objective of Working Capital?
Minimize Liquidity Cost and insolvency risk
What is working capital policy?
1.Conservative style: which its advantage is ~
Decrease liquidity risk
**Disadvantage: Increase Opportunity cost of return
**the company seek to increase the C.assets and decrease liabilities so the working capital ratio is high/increase under this style
- Aggressive style: which seek to increase profitability by investing in opportunity cost(decrease)
adv: profitability
disadv: short term liquidity problem
* *under this style the ratio is LOWER
Notes on Working Capital
the Ratio is volatile by Inventory cost (Carrying cost) which increase the ratio carrying excessive inventory increase the cost of insurance and obsolescence/ spoilage
what are the motives of holding cash
- Transactional
- Precautionary
- Speculative
how to determine the optimal level of idle cash/hold cash
by cost-benefit analysis
this mean u need to calculate the opportunity cost of holding cash idle against liquidity risk/insolvency of being unable to pay the loan when its due
what is compensating balance
Minimum balance in bank that should be held, frozen balance with noninterest bearing, that is for bank rendering services for the company, so its like the company gives the bank a certain amount non withdrawal for certain time.
What is Marketable Securities
Short term investment with Low Yield and Low Risk with highly active market
type of Marketable Securities
1.Money Market: it include short term investment in equity and debt instruments
2. U.S Treasury as follow:
A. T-Bills with 1 Year or less and they r sold on Discount
B. T-Notes with 1-10years
C. T-Bonds more than 10 years
- Federal Agencies Securities: are type of securities issued by U.S govt and held by full faith and credit of govt
- Repurchase Agreement (Repos): is agreement between party and govt that first party buy a security from govt for 50 and the govt is committed to buy back the security for 70,
* *Type of short term investment, Secured - Banker Acceptance is like certified check that is due in next couple months, so the holder offer to sell this cheque on Discount
- Commercial Paper: is type of financing, issued by COMPANIES who need the fund, Short term, Unsecured, Usually sold at discount
- Certificate of Deposit: is a deposit in bank for certain time and cant be withdrawn before maturities without HIGH Penalty
