Fundamentals of Financial Management (Concise 6th Edition)

474 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management

called net working capital, which represents the amount of money that the! rm

must obtain from nonfree sources to carry its current assets. Here is the 2008 net

working capital for Allied Food Products, the! rm we discussed in Chapter 3:

Net working capital! (Current assets) " (Payables # Accruals)

! $1,000 " ($60 # $140)! $800 million

SEL

F^ TEST How did the term working capital originate?

Di! erentiate between working capital and net working capital.

15-2 CURRENT ASSET INVESTMENT POLICIES

In this section, we discuss how the amount of current assets held affects pro! tabil-

ity. To begin, Figure 15-1 shows three alternative policies regarding the size of cur-

rent asset holdings. The top line has the steepest slope, which indicates that the

Note: The sales/current assets relationship is shown here as being linear, but the relationship could be curvilinear.

Current Asset Investment Policies (Millions of Dollars)

F I G U R E 1 5! 1

10

20

30

40

0 50 100 150 200

Current Assets

($)

Sales ($)

Relaxed

Moderate

Restricted

Policy

Current Assets per

$100 of Sales

Turnover of Current

Assets: Sales/CA

Relaxed $30 3.3x

Moderate 23 4.3

Restricted 16 6.3