(^180) Financial Management
The value in Table 4 illustrate that the net effect of the two changes illustrated earlier
is an increase in profits of $45 and a decrease in net working capital (liquidity) of $600.
The trade-off here is obvious; the firm has increased its profitability by increasing its
risk.
Table 4 shows that the firmís net working capital has been reduced from its initial level
of $1,100 to $500. The firmís initial net profit can be thought of as the difference
between the initial profits on total assets and the initial cost of financing. The initial
profit on total assets was $570, and the initial cost of financing was $480. The initial
net profit was therefore $90 ($570 ñ $480). After the changes in current assets and
current liabilities, the firmís profits on its total assets increased to $600 while the
cost of financing decreased to $465. Its net profits, therefore, increased to $135
($600 ñ $465)..
Finance Mix for working capital
The finance mix for workng capital is as follows:
l Current Assets ( in descending order of liquidity):
- Cash
- Bank Balance
- Short term investments
- Trade Debtors
- Inventory
l Finished Goods
l Work in process
l Raw materials
l Stores & Spares - Pre-payments (Insurance, advances etc.)
l Current Liabilities: - Trade Creditors
- Bank Overdraft or Cash Credit
- Short Term Borrowings
- Provision for taxes
- Provision for dividends
If current assets is the source from which current liabilities are to be met (as and when
they fall due) during the course of business operations, then their strengths or weaknesses