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Chapter 7

Working capital management

Outcome

By the end of this session you should be able to:

 define working capital and identify its elements

 explain the objectives of working capital management in terms of liquidity and
profitability, and discuss the conflict between them

 explain the importance of working capital management to good financial
management

 describe the principle and components of the cash operating cycle including the
impact on it of accounts payable and receivable

 calculate the length of the cash operating cycle from supplied data

 calculate the current ratio and explain its relevance

 calculate the quick ratio and explain its relevance

 calculate the average collection period for receivables and explain its relevance

 calculate the average payable period for payables and explain its relevance

 calculate the length of a company’s cash operating cycle by selecting relevant
data from the company’s accounts and discuss the implications for the company

 calculate the sales revenue/net working capital ratio and explain its relevance

 calculate the level of working capital investment in current assets from supplied
data

 discuss the effect of a business’ terms of trade on the length of the working
capital cycle

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