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Presented By:

Asjad BashirFA10-MBA-071Ansar Manzoor...FA10-MBA-072

Fahad KhalilFA10-MBA-078

M.Jawad..FA10-MBA-076M.Safdar..FA10-MBA-069

Nabeel Ghafoor..FA10-MBA-095

Presented To:

Mam: Syeda Mahlaqa Hina

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Short-Term Liquidity RisksWorking capital: The excess (deficit) of

current assets minus current liabilities.

WC = CA - CL

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The level of current assetslevel of current assets and the methodmethodof financing those assetsof financing those assets areinterdependentinterdependent.

A conservative policyconservative policy of high levels ofcurrent assets allows a more aggressiveaggressivemethod of financing current assets.

A conservativeconservative method of financing(all-equity) allows an aggressive policyaggressive policy oflow levels of current assets.

Combining Liability Structure and

Current Asset Decisions

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Conservative PolicyPolicy::

FirmFirm cancan reducereduce risksrisks associatedassociated withwith shortshort--termterm borrowingborrowing byby

usingusing aa largerlarger proportionproportion ofof longlong--termterm financingfinancing..

AggressiveAggressivePolicyPolicy

::

FirmFirm increasesincreases risksrisks associatedassociated withwith shortshort--termterm borrowing borrowing byby

usingusing aa largerlarger proportionproportion ofof shortshort--termterm financingfinancing..

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Working capital deficiency

In working capital management if current assets are less

than current liabilities, an entity has a working capital

deficiency, also called a working capital deficit.

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Combining Liability Structure and

Current Asset Decision.

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Current assets

An entity shall classify an asset as current when:

It expects to realise the asset, or intends to sell or consume it, inits normal operating cycle;

It holds the asset primarily for the purpose of trading;

It expects to realise the asset within twelve months after thereporting period; or

The asset is cash or a cash equivalent (as defined in FRS 7)unless the asset is restricted from being exchanged or used tosettle a liability for at least twelve months after the reportingperiod.

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Current liabilities

An entity shall classify a liability as current when:

It expects to settle the liability in its normal operating cycle;

It holds the liability primarily for the purpose of trading;

The liability is due to be settled within twelve months after the

reporting period; or

The entity does not have an unconditional right to defer

settlement of the liability for at least twelve months after the

reporting period.

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The Working Capital Decision

With the working capital decision, current assets and currentliabilities become the focus of the financial manager.

Such items as cash balances, accounts receivable, inventory levelsand short-term accruals (such as prepaid rent or utilities) are

included among the short-term assets that comprise one componentof working capital.

Also with the working capital decision, we concern ourselves withshort-term obligations such as accounts payable to vendors, andother debt that is expected to be paid off within one year.

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Working capital management involves financing and controlling the

current assets of the firm.

Management must distinguish between those current assets that are easilyconverted to cash and those that are more permanent.

The financing of an asset should be tied to how long the asset is likely to

be on the balance sheet.

Long-term financing is usually more expensive than short-term financing

based on the theory of the term structure of interest rates.

Risk, as well as profitability, determines the financing plan for current

assets.

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CASH

RAW MATERIALS WORK IN PROGRESS

FINISHED GOODS

ACCOUNTS RECEIVABLE

Operating current assets cycle

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1. Investment decision

2. Financial decision

3. Assets management decision

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Investment decision:

it determines the total amount of asset needed by a firm hence

closely tied to the allocation of funds, we have two types

of investment decision which is capital investment and working

capital investment.

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F

inancial decision: Financial manager needs to decide on how to finance

the assets the source of funds examples whether to

borrow debts or share capital or retained earnings,

whether to borrow short, medium or long term, the

needs to determine how much dividend to pay out as

this will directly affect the financial decision.

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Asset management decision:

once asset has been purchased and appropriate

financing are secured it now involves the efficient and

effective management of current asset like cash

inventories and so on.

i-e examples of assets management is extension of

credit terms to increase sales and to hold more stocks or

on a longer term.

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Combination of liability

Business risks can be minimized with working capital

management. Organizations are usually focused on

cash. By combining the accounts payable, as well as

supply chain issues, such organizational focus can also

manage external issues like the legal and business

environments.