1. Why is working capital one of the most important activities of a financial ma
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Question
1. Why is working capital one of the most important activities of a financial manager? What is the net working capital?2.tryst Enrgy inc. Has an averagenof inventory of 65 days, an average collection period of 60 days and an average payment period of 65 days, The firms total annual outlays for operating cycle investment are $3.65million. Assumingna 365day year,how much financing is required to support its cash conversion cycle? 1. Why is working capital one of the most important activities of a financial manager? What is the net working capital?
2.tryst Enrgy inc. Has an averagenof inventory of 65 days, an average collection period of 60 days and an average payment period of 65 days, The firms total annual outlays for operating cycle investment are $3.65million. Assumingna 365day year,how much financing is required to support its cash conversion cycle?
2.tryst Enrgy inc. Has an averagenof inventory of 65 days, an average collection period of 60 days and an average payment period of 65 days, The firms total annual outlays for operating cycle investment are $3.65million. Assumingna 365day year,how much financing is required to support its cash conversion cycle?
Explanation / Answer
1. Working Capital Management demands a greater share of the attention of the Financial Manager (FM). It requires continuous monitoring by the FM and is critical to the short term solvency and also profitability of the firm.
The term Working Capital refers to the excess of Currents Assets over Current Liabilities. It represents the resources available to the business to conduct the day to day operations and to meet its short term obligations. Hence, working capital management is about managing the relationship between a firm's Current Assets and Current Liabilities.
Since the components of Current Assets (cash, debtors, inventory etc) and that of Current Liabilities (Sundry Creditors, etc) keep changing in form and value continuously, it requires constant attention of the FM.
While managing working Capital, the FM has to trade off between Profitability (Return) and Liquidity (Risk) .
Hence, the FM will have to take decisions with respect to Working Capital after striking a trade-off between Risk and Return (Liquidity Vs Profitability), which will depend on the risk perception and risk assumption by the firm.
Thus, Working Capital Management is one of the most important activities of a FM as he has to not only balance between Risk and Return but also do it continuously and keep on reviewing his policies and decisions.
NET WORKING CAPITAL is the excess of Current Assets over Current Liabilities.
It is obtained by adding all the current assets and then reducing the total of current liabilities from the total of current assets. It represents the amount of working capital to be financed from long term sources.
2) The Cash Conversion Cycle of Tryst Enrgy Inc. can computed as below:
Inventory Holding Period + Average Collection Period - Average Payment Period
which is equal to 65 days + 60 days - 65 days = 60 days.
No of Cash Conversion Cycles in a year = 365/60 = 6.08 Say 6
The firm's annual outlays for operating cycle (given) = $ 3,650,000 (this is for the 6 cycles)
Therefore, outlay required for 1 cycle = 3,650,000/6 = 608,333 $
Hence, financing required to support its csah conversion cycle is $ 608,333
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