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(^170) Financial Management
The dashed line could have even been drawn below the line designating fixed assets
, indicating that all the current assets and part of the fixed assets are financed with
short-term credit ; this would be a highly aggressive, non-conservative position, and
the firm would be very much subject to potential renewal problems.
Figure 4: Fluctuating versus Permanent Assets and Liabilities
Alternatively, as in Figure-4, the dashed line could be drawn above the lien designating
permanent current assets, indicating that permanent capital is being used to meet
seasonal demands. In this case, the firm used a small amount of short-term credit to
meet its peak seasonal requirements, but it also meets a part of its seasonal needs byíí
storing liquidityíí in the form of marketable securities during the off-season. The humps
above the dashed line represent short-term financing, the troughs below the dashed line
represent shortñterm security holdings.
Longer term versus Short-term Debt
The larger the percentage of funds obtained from long-term sources, the more
conservative the firmís working capital policy. The reason for this, of course, is that
during times of stress the firm may not able to renew its short-term debt. This begin
so, why firms ever use shortñterm.
Concepts of Working Capital
There are two concepts of working capital- gross and net.
l Gross working capital refers to the firmís investment in current assets. Current
assets are the assets which can be converted into cash within an accounting
year (or operating cycle) and include cash, short-term securities, debtors, (accounts
receivable or book debts) bills receivable and stock (inventory).
l Net working capital refers to the difference between current assets and current
Time Period
1 2 3 4 5 6 7 8
Dollars
Mrketable
securities
Short-term
financing
Long-term
debt plus
equity capital
Permanent current assets
Fixed assets
Short-term financing
requirements