Working Capital and Short Term Financing

Introduction to Working Capital
            Working capital can be defined as the conversion of raw materials in to finished goods. Another way of defining working capital can be the total amount of daily working liquidity. The simplest way of calculating the working capital is to subtract the existing liabilities from the existing assets. Working capital is actually a way to find out that how much amount of liquid asset is owned by a company for building and flourishing its business. The total amount of liquid asset can be a positive number as well as a negative number. So this fact makes it quite clear that the company which is having a large amount of liquid assets is supposed to be successful and it is also expected that such a business can easily improve and expand. For a successful asset the amount of liquid asset must be positive which shows that the assets are more than liabilities. The negative amount of working capital shows that the business is lagging and the funds that are required for the growth of the business are not available. The working capital of a company can also be defined by the cash flow statement of the company and the supply chain. The computation of working capital also requires keeping in view the total debt of the company. The simplest definition of the working capital can be the availability of money for performing the day to day operations of any company or business. (TW9, 2009)
            It is important to measure and find out the working capital of the company or business. The working capital shows that how healthy, efficient and effective the organization or company is. The working capital consists of all the monetary information of the business or company like cash, inventories, payable accounts, receivable accounts and debt and so on. The working capital gives an overview of all the activities of the company that are taking place daily like collecting revenues, management of debt and inventory and payments and so on. If a company is having a positive working capital then the company is no doubt able to pay off the liabilities without delay. Whereas the company having negative working capital would not be able to do so. This is the reason for which the analysts are always concerned with the increase or decrease in the working capital. The businesses always work hard and strive to improve their working capital and then maintain it by trying to increase their sales. The working capital can be calculated by using different methods and formulas. It is not an easy task to keep working level maintained and smooth. The working capital varies from industry to industry and from company to company. Working capitals of two companies or businesses can only be compared if the companies belong to the same industry. It is essential for any business to manage its working capital otherwise; the business can run out of cash and funds. At such a stage the need of working capital is felt and tries are made for expanding the business so that more cash can be made. The falling working capital can also result in to the failure of a business so it is necessary to concentrate over increasing and improving the working capital. (Working capital, 2009)

Working Capital Management
            Working capital management includes all the activities that are used to manage the working capital. Working capital management includes all the decisions that are related to manage the working capital and also the measures that are taken for short term financing. There are various activities that are included in the working capital management but the most important one is to manage the relationship between the short term assets and short term liabilities of any business or company. The basic aim and objective of working capital management is to make sure that the firm is in a position to carry on its day to day operations efficiently. The working capital management also analyze that the company is having enough flow of cash which can be used for the everyday expenditure of the operations and for paying the debts. The decisions that are being taken for the short term periods like for one year period. These decisions are made for increasing the profit of the firm and also for controlling the cash flow within the firm. Management of the working capital involves many activities like managing the assets, cash, inventories and debts related to the company. The cash flow within the firm can be computed by observing the cash conversion cycle. Cash conversion cycle observes the total number of days from the expenditure of cash that has been made for the raw material so that payment can be received from the customer. So in this regard, it can be said that the decision that are related to the inventories, accounts receivable and account payable are very important for maintaining the cash flow of any organization and as a result improving the working capital.
Policies and Techniques used for Managing the Working Capital
            The working capital can be managed by using some of the rules and policies. These rules and policies are strictly followed throughout the firm in order to manage the working capital. All the rules and policies that are necessary for the management of working capital are actually related to manage the cash and flow of cash. The aim of these policies is to handle the assets and short term financing of the firm so that the flow of cash and the returns over it can be accepted.
Cash Management
The policy of cash management finds out that how much amount is required for performing the day to day operations of the business. The cash management controls the flow of cash so that working capital is managed.
Inventory Management
This is another important task to find out that what is the level of inventory that can be helpful for increasing the production of the business without any interruption? The major concern is to increase the production and at the same time minimizing the investment that is being made in the raw materials. The cost of reordering is also reduced and as a result the cash flow is increased.
Debt Management
The debt can be managed by applying the suitable policy for controlling the credits and debts. If proper policy is implemented then for sure the customers will be impressed by the business and will get attracted towards it.
Short Term Financing
The short term financing is use to find out the most suitable way of financing. (How would you define working capital? n.d)
Short Term Financing Plan
            In a business, there are two types of finance plan which can be applied by the business individuals, by working according to these plans a business can fulfill its needs or requirements. A process in which assets of an organization as well its current liabilities are affected by the decisions made by the organization managers, and due to this the firm is experience from impacts within a calendar year is known as short term finance. It is basically an analytical process which helps organization managers to analyze their performance in a short period of time. Also, this short term finance informs managers the net working capital of the organization. In situations where the transactions are to be completed quickly short term finance provides the businesses to complete that task in specified time. So it provides opportunities for the businesses and the investors, and the process is completed within a certain p of time set forth by the manager of the organization. We can say that short term finance basically focuses of speed, which enables to complete task. The short term finance provides the organization with opportunities in such a way that they can fulfill their currents need, which can be due to decrease in sales and increase in the purchases. Hence organizations having an excess amount which can be processed for a short period due to which they complete their requirement. In a commercial term short term is being used to clear debt such as Accounts Receivables, Inventories and meeting the liabilities of the firm. There are different plans being worked upon for short term finance. (short term finance, 2005)
Firstly an organization has to keep in mind all their assets, evaluate them and then make a decision on how much investment can be done. They have to keep in mind the flexibility of their decision, in which their sales amount should be less than the value of their current assets, which is to gain at a low interest so that their profits decrease. Apart from being flexible they should also be restrictive in their approach and make their decision in such a way that their sales amount exceeds the current value of their assets, which is to gain at a high interest rate so to increase their profits. Secondly an organization can finance their current assets by flexible and restrictive planning. In short, short term financing plan helps an organization to belief in themselves and avail the opportunities which are provided to them in a number of ways. They can maintain their investments in cash or in marketable securities in order to have cash reserves, which provide them the opportunity to be flexible and reduce the chance of being stressed due to financial terms. (Hill, 2005)
Advantages of Short Term Financing
            The short term financing is a way of financing that can offer many advantages. The short term financing offers less risk of liquidity of business if it is compared with the long term financing and this is no doubt the biggest advantage for any business or firm. Another advantage can be the low rate of interest because of the short time period. The businesses have to pay low cost for the loan that has been taken if compared with the other kinds of financing. The risk of mounting interest rate is also reduced because of short time period. The short term financing also allows making expenses according to the budget of the firm or company. The short term financing permits to pay back the loans in short durations but the time period of the loan is based on the type of loan that has been taken. Some time, the loan is a big amount and the person is not able to pay it back in less time so the duration can be increased. The short term financing allows paying less rates of interest that are to be paid in long term financing. When finance is provided by the lenders at a short term they charge high interest rates but after the term is matured, you would have paid comparatively less interest amount at lower interest rate which is due to large duration of these loans. (Baker, n.d)
Disadvantages of Short Term Financing
            Apart from having advantages of short term financing, there are also some disadvantages associated with the short term financing. The most important disadvantage of short term financing is that as the short term finances are to be paid back in the short period of time so the business has to monitor the flow of cash as they have to pay back the loan. The profit that has been earned is mostly utilized in paying back the loans because the time period is short and not more time can be passed. It has been observed that because of having many advantages and also because of short time period the businesses prefer to take the short term loan without any hesitation when there is a need. But too many debts can spoil the value and position of the organization.  The disadvantages of the short term financing can affect the organization badly and it is always recommended that a company should take the short term financing if it is in a position to pay the amount back within the given time period. The flow of cash should be frequent in the organization for the short term finance and for this reason special care has to be given over the activities of a firm. The another disadvantage of short term financing is that
This kind of loan is not enough for the huge projects and plans as it has to be returned with in short period of time and obviously huge projects need large time period for the completion. If any firm takes loan that has to be paid back in the short p of time then the firm should closely monitor whether the loan has paid back in time or not. The reason for this monitoring is that if the countries do not pay back the loans then their position is declined in front of the credit bureaus and institutes that used to provide loans. The interest rate over the short term loans is very high and tends to increase time to time if the loan is not paid back in time. It is also not easy to take the short term finances and complex processes and conditions are involved. Many different criteria are to be fulfilled before taking the short term finances. Along with these factors another huge disadvantage of taking short term finances is that it sometimes involves great amount of interest. The amount of interest depends on the purpose for which the loan is being taken. If the loan is being taken for some huge project that is having a great deal of risk the rate of interest over such loan will also be higher. While taking short term finances security is taken and incase of late payment or nonpayment these securities can be taken by the lender. (Definition of debt financing, n.d)
Relationship between Short Term Financing and Working Capital Practices
            Short term financing is closely related to the working capital as all the decisions that are related to working capital as well as to short term financing are termed as working capital management. For managing the working capital, the short term financing is very necessary. It is essential for any company to have enough amount of cash flow within the organization so that the business can carry on its day to day operations. The source of financing is very important in the management of assets in any company or organization. It is a fact that if the company is notable to manage the short term loans then it is also not capable of surviving in the long run. The working capital is closely related to the financing as the formula for calculating the working capital is
Working capital = total assets – total liabilities
All the practices of the working capital are related to the short term financing. The relationship between the short term financing and the working capital practices is given as under:
Cash Management: One of the major concerns of working capital is to manage the flow of cash which is directly related to the short term financing because if the flow of cash is controlled then the company will not run out of cash and there will be no need of taking short term finances. But if there is a need of taking loans then still cash flow should be managed properly so that the loan can be returned within the time that has been given. If the cash is not managed properly then for sure the company will have to pay the high rate of interests.
Inventory Management: Inventory management is the way by which the record is attained, managed and assorted. The inventory management keeps record that where the investments are being made. The inventory management makes sure that what orders are being made and also keeps record of the shipment that are being made. The inventory is necessary to be managed so that cash flow can be managed and then the short term finances are paid back in time. If the inventory is properly manages then it will be kept in view that what is the total working capital of the business at the moment and so the short term finances will be returned back in time. Just in Time inventory and Economic Order Quantity are the approaches that are taken for managing the inventories.
Account Receivable Management: Account receivable management is also a way to manage the flow of cash and also the finances. It is necessary that the ash should be efficiently managed. The management of account receivable shows the overall strength of the company and the company is able to find out that when it needs how much finance. The account receivable management also shows that what amount is existing in the business and the managers can hence keep aside the loans that have to be returned back. (Hill, 2008)
The above discussion makes sure that the short term financing is closely related with every activity of working capital management. As all the activities of working capital are aimed to improve the flow of cash and manage the inventories and all the monetary relate activities. If the flow of cash is controlled and managed then there will be not much need of taking the short term finances again and again. In the situations where it becomes necessary to take short term finances then the working capital management activities keep in view that what is the total asset of the company and then the company becomes able to pay back the loans in time. The working capital management actually improves the health of the business in terms of finance and decides that when the business needs the short term finance. Other many activities also bring under notice that when the loan has to be returned. The relationship of working capital management and the short term financing is very strong and close and cannot be denied. There are different approaches of the working capital and the source of financing depends on the approach of working capital management. (Bush, 2007)
Determinants of Firm’s Net Working Capital
The investment of a firm which is expected to be converted in cash within a calendar year by investing in their current assets is called a working capital. A net working capital of a firm is the difference between firm’s current asset and current liabilities. A firm can determine its net working capital by a number of ways which are mentioned below:
Managing Current Assets and Liabilities
When a firm has greater investment in current assets the risk factor is low and liquidity is greater. Though the current assets of a company, that is cash and marketable securities do not earn firm much profit which is because of swapping of low income and low risk illiquidity. When a company manages its current assets and liabilities in such a manner that they get the best possible outcome, which helps to provide the firm with cash and marketable securities, and this helps to identify a firms net working capital.
Working Capital Management
A firm can manage its working capital by investments in their current assets which provide them with capital through which they can pay of their liabilities and hence can manage their working capital to determine their net working capital.
Large investment in Current Assets
When a firm invests large amount in their current assets, which usually do not earn them much profit or even no profit, the firm faces different problems such as reduction in the production stoppages, sales are lost, and also the firm would not be able to pay their bills on time hence can affect profits. Due to this profit of the firm does not increase rather they can decrease which is because of stoppages in production.
Asset Investments financed by Current Liabilities
When a firm relies too much on short term debt or its current liabilities to finance the investment on their current assets they can experience larger risk of illiquidity. Moreover such investment of their current assets can be sufficient as short term finance is less costly than a long term finance and so a firm can increase their net working capital within a specified time, and the process will be fast as well so with their net working capital they can plan different things which can be more beneficial for the firm.
Risk-Return Trade-off Managing Net Working Capital
When a firm to manage its net working capital invests in the additional marketable securities and inventories, the profitability of the firm decreases while the liquidity of the firm increases. When, a firm increases its short term finance as compared to its long term finance, their profits increase and the liquidity of the firm decrease. Hence a firm when increases financing of short term over long term they get more profit which helps to increase their net working capital. (Managing Current Assets and Liabilities, n.d)
Advantages and Disadvantages of Current Liabilities
            There are different advantages and disadvantages of current liabilities to finance a firm’s working capital in order to provide them with all their working requirements. The main advantage for the firm is that it provides the firm with flexibility, by which they can source their financing as short term finance requires less capital and allows a firm to be flexible in their payments. Also short term financing is a cheaper way rather than long term financing which gives an additional advantage to the firm to increase their net working capital. When a firm borrows some amount from a bank they have to pay some percentage of interest to the banks while returning the principal amount. In terms of short term finance the amount to be returned has less interest rate than compared to the long terms. For example when a firm borrows an amount for 3 months, then at its maturity the amount to be returned will have an interest rate of 4% but if the firm borrows an amount for a longer period such as 6 months, then at its maturity the amount to be returned will have an interest rate of 4.6% hence decreasing their net working capital.
            The disadvantages include greater risk for the firms because when the firm uses short term finance they have to repay the loans very often since they have to generate the working capital before the maturity so that they can write off or pay off their debts rather than in case of long term in which a firm has to repay its borrowings after a longer period enabling them to have more time than in short term finance. Also disadvantage for a firm is that they are uncertain about the interest rate or percentage which varies from year to year, but at long term finance the interest rates do not tend to change enabling them to work accordingly. (Financing Working Capital with Current Liabilities, n.d)
Hedging Principle or Principle of Self Liquidating Debt
            Hedging principle is also known as the principle of self liquidating debt. This principle is basically a guideline to manage or control the level of liquidity of the business. This principle observes that what the total assets of the company or business are at the moment which helps in determining that what should be the level of liquidity of the organization so that the growing obligations can be met on time. Hedging principle can be termed as the guideline for the working capital policies. This principle asserts that the properties of the asset that are used to increase the productivity of the cash flow within the organization should match the maturity of the source by which the financing has to be made for the asset. In a nut shell it can be said that the finance maturity should be matched with the properties of assets that can increase the productivity. The maturity matching can be termed as a process in which the life of the asset is compared with the time period of the financing source. This is necessary for choosing the appropriate source of financing that can in result helps in increasing the productivity of the asset. It can be said that hedging principle actually provides the base for taking the decisions for any firm’s working capital.
Relevance of Permanent and Temporary Sources of Financing
The hedging principle also states that the requirements of the assets of any firm should not be fulfilled by using the sources that are spontaneous in nature like payables or accruals. The spontaneous sources can be defined as all kinds of sources that are made accessible if demanded. The examples of spontaneous sources include the trade credit and account payable and so on.  The hedging principle also provides a rule for financing the assets. It has introduced two types of asset investments; permanent asset investment and temporary asset investment. The assets that are permanent in nature should be financed using the permanent sources where as the temporary assets should be financed using the temporary sources.
 Permanent Asset Investment
Primary asset investment can be defined as a way of investment that is being made over the asset that is expected by the firm to hold for a long period of time like for one year. The asset in this investment can be of any type; fixed or current. The expectation for the permanent investment is made for the expected future of the organization. All kinds of long term financing are involved in this type of investment. The basic idea is to involve the source of finance that can exist for longer.
            Temporary Asset Investment
The temporary asset investments are the investments that are made over the assets for which the firm plans to liquefy or sell out with in some period of time. Generally, this type of investment is made over the inventories and receivables. These assets are not expected to survive for the long time period like one year. These investments can also be made over the fixed assets. It involves the source of financing that does not have a long period of time and it mostly includes the bank loans and commercial papers and so on. The temporary financing sources include all the loans, liabilities and credits as well.
It can be concluded that the hedging principle or the principle of liquidity states that the spontaneous sources of financing should not be used for financing the requirements of the assets of a firm instead the financing should be done by using the rules given by the hedging principle. The rule is simple and it states that the permanent sources of the firm should be financed with the permanent sources of investments and the temporary assets of the firm should be financed using temporary sources of financing. (Working capital management and short term financing, n.d)
Cash Conversion Cycle
In short we can say that, the length of time (in days), which a company takes to convert its resource inputs into cash flows is known as CCC or Cash Conversion Cycle. We can also say that it is the sum of the total number of days of sales outstanding and inventory less the total number of days of payable outstanding. It can be denoted by the following formula:
Cash Conversion Cycle = Days of          +          Days of            –              Days of
(CCC)             Sales Outstanding      Sales in Inventory      Payable Outstanding
So in order to calculate a firm’s cash conversion cycle we need to determine the days of sale outstanding, days of sales inventory and days of payable outstanding. By determining all of the above we can calculate the cash conversion cycle of a firm, hence determining how much days a firm takes to convert its production inputs into cash flows.
It is an easy method by which a firm can calculate how much time is needed to collect a firm receivable and to sell their inventory, which can be measured when a sale is made to the customer, and also it lets a firm calculate in how many days they are able to pay their bills without being incurred a penalty.
            The days of sales outstanding (DSO) can be calculated by determining the accounts receivable of a firm, and sales of a firm in a calendar year. It can be calculated by the help of the following formula:
Days of Sales Outstanding = Account Receivable
                                                    Sales / 365
            The days of sales inventory (DSI) can be calculated by determining the accounts inventory of a firm and sales of a firm in a calendar year. It can be calculated by the help of the following formula:
Days of Sales Inventory =     Inventories
                                               Sales / 365
            The days of payable outstanding (DPO) can be calculated by determining the accounts payable of a firm and sales of a firm in a calendar year. It can be calculated by the help of the following formula:
Days of Payable Outstanding =        Accounts Payable
                                                                Sales / 365
Hence, by calculating all the above we can determine a firm “Cash Cycle”. (Cash Conversion Cycle, n.d)
Effective Cost of Short Term Credit
There are many types of short term finance amongst which one is cost of the short term credit, which also is considered as a very important factor in cost of credit. To estimate the cost of short term credit we rely on the basic equation of interest, and are very easy to calculate:
            Interest = Principal x Rate x Time
For example, when $1000 is being borrowed for six months at an interest rate of 8 percent:
Interest = 1000 x 0.08 X 0.5 = $40
Annual Percentage Rate (APR) can be calculated by the help of the following formula:
APR = Interest * 1
Principal Time
Another example to calculate effective cost of short term credit is:
A company plans to borrow $1,000 for a period of ninety days. The firm then will be paying $1,000 plus an interest amount of $30 at the maturity. Thus the effective rate of interest can be calculated in the following way:-
APR = 30 * 1 . = 12%
1000 90/360
Thus the annual effective cost provided by the loan is 12%.
Also effective cost of short term credit can be calculated by Annual Percentage Yield Formula. When calculation effective cost we use compound interest to calculate Annual Percentage Yield.
APY = (1 + i/m) m – 1
Where,
APY = Annual Percentage Yield
i = Nominal Rate of Interest per year.
Hence, the effectiveness is raised of the cost of short term credit by the help of annual percentage yield formula.  (Estimation of the Cost of Short-Term Credit, n.d)
Basic Sources of Short Term Credit
            The short term credit can be defined as the finance that has been provided b any bank or financing institute t the borrower for the short period of time. The time period depends on the purpose for which the loan is being taken. There are investment rates that are placed over these kinds of credits and if the loan is not returned in the given period of time then the rate of interests start increasing and it gets difficult to pay the loan back. So, the firms should take such loans when it considers that it can pay back the loans within the given period of time. The time period varies and can range up to the year period. The basic factors that should be involved while selecting the source of short term financing are given as under:
The credit that is available.
The effective cost of the source of credit.
The impact that can be made by using that particular source of financing over the availability and cost of other sources that can be used.
All the above three factors should be considered while making the choice of the source of credit. All these factors are important and neglecting any of these factors can harm the firm and once the credit has been taken then there is no way out. So, special consideration is required while selecting the source of credit for avoiding the regret that can be faced after selecting the wrong source. (Working capital management and short term financing, n.d)
            When we talk about the source of short term credit then there are two sources available which are secured credit and unsecured credit. These two types then in turn have their own source. The sources of short term credit are described as under:
Secured Loans
Secured loans are supported by the assurance of some particular assets as security. This additional security is being provided by the borrower in the form of assets so that if the borrower is not in condition to pay the credit then the lender keeps that security asset. The most common suppliers of secure loan include the commercial banks and finance related institutes. The basic sources for providing the security to the lenders include the inventories and account payable. If any default occurs in the agreement that was made while providing the loan then the lender is able to claim the security.
Unsecured Loans
The unsecured loans are the loan that does not take any asset as security. The only security for these lenders is the faith over the ability of the borrower that he will be able to pay back the loan with in the given time period. There are many different sources that do provide unsecure loans but the major sources include trade credit, wages and taxes, bank credit and commercial paper. As the unsecured sources do not undertake any asset as their security so in such cases a lot of conditions have to be met before taking the credit.
The above are the two sources by which the short term credit can be earned. The selection of source depends on the nature of project for which the loan is being taken. There are also many other factors over which the selection of source depends like amount of credit, position of firm and so on. (Working capital management and short term financing, n.d)
Risks faced by Multinational Firms
There are different risks being faced by firms due to currency rates. When there is a change in the rate of the currency, a firms investment value changes. There may be an increase or decrease in the value of their investments. Also there are risks for an investor, when he has to close out his investment due to a sudden change in the rates of the currencies on a short or long. All these risks account to create problems for the firms or the investors.
Multinational firms have to be extra cautious for such risks which can impact on their overall performance. They have to consider while making decisions in terms of exchange rate as it could have a huge impact on their working capital. If an asset owned by a multinational company is valued in a foreign currency, and after some time the value of that foreign currency declines, the multinational company will suffer from huge losses. The losses which are then being faced by the companies can be offset when there is a decline in the liabilities of a company, if the liabilities are in terms of the same foreign currency. Hence, the companies are quite concerned about their net working capital, which are assets of a company minus the liabilities of a company. The managers of a company play an important part because they make the decisions and control the working capital of their company. The management of a company’s working capital basically involves the controlling of a company’s investments which are then converted into inventories. These inventories are then converted into accounts receivable and then cash flows. When the cash flows the company can then make the payments when the investment matures. Hence, working capital is the main function which has to be used in such a way that the company can pay off their bills at time. (Multinational Working-Capital Management, n.d) Read about advantages of cash payment
Conclusion
            In a nutshell the working capital can be described as the transformation of raw materials in to the finished goods. The working capital is calculated in many different ways but the most simplest and common way of calculating the working capital is to subtract the total number of liabilities from the total number of assets. The working capital is important to measure because it provides the information that how much liquid asset is owned by the company that can be used for the improvement of business. The amount of liquid asset that is available can be negative as well as positive number. The negative number shows that the company is lacking the funds that are necessary for the growth of the business. On the other hand, the positive working capital shows that the business is succeeding and the number of assets is more than the number of liabilities. The calculation of working capital gives an overview about the financial condition of any firm so it is necessary to calculate the working capital. The working capital provides the amount of debt as well as amount of assets that are available to any organization. The working capital management includes all the activities that are related to the control and management of the working capital. The management of working capital is necessary for the making the firm a healthy and flourished one. The decisions that are related to the management of working capital and financing are all included in the working capital management. The management of working capital makes sure that the company is having enough assets and it is in a position of carrying out its day to day operations. This paper in depth analyzes the policies and techniques of working capital management. These policies and techniques include cash management, inventory management, debt management and short term financing. This paper gives very much emphasis on the short term financing scheme. The short term financing can be defined as a way of financing in which the lender gives the loan over short period of time and the loan has to be returned back by the firm within this period of time. The short term financing should be adopted by the firms that do have the ability to return the payment within this given time period. If the loan is not returned within this time period then the borrower has to pay the interest as well. The rate of interest increases with the passage of time. So, it is recommended that the firms should adapt the method of short term financing if it feels that it can pay back within the time. The advantages and disadvantages of the short term financing have also been discussed in this paper. There are two types of short term financing and these are secured loans and unsecured loans. The secured loans are the ones in which the lender takes some asset from the borrower as security and if the borrower is not able to pay back the amount within the time period then the security will be claimed by the lender. Whereas the unsecure loans do not undertake any asset in the form of security except for the faith over the borrower’s ability. The paper also discusses the relationship between the short term financing and working capital. After observing it can be concluded that both the terms have a strong link in between them. All the practices of the working capital do have some affect over the short term financing. This paper also focuses over the major determinants of the working capital. These determinants include the management of current assets and liabilities, management of working capital, investments in current assets, assets investments made by the current liabilities and risk-return trade-off managing net working capital. The paper also gives an overview of the advantages and disadvantages of the liabilities that are owned by a company. An important principle known as hedging principle is also provided in this paper which gives the solution that how a company should choose the type of investment that should be made over any asset. Hence it can be said that by planning short term finance in an effective way, organization can boost up their process to acquire working capital which later helps the organization to pay off their bills.
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