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WORKING CAPITAL

WORKING CAPITAL. Lesson 9. What is working capital?. Amount of money available to finance the day-to-day operations. Why does it become so important? As an indicator of financial problems Can maximize growth. Can help minimize future financial shortcomings.

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WORKING CAPITAL

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  1. WORKING CAPITAL Lesson 9

  2. What is working capital? • Amount of money available to finance the day-to-day operations. • Why does it become so important? • As an indicator of financial problems • Can maximize growth. • Can help minimize future financial shortcomings.

  3. What is working capital? (slide 2) • Determining the amount of working capital needs. • Current assets minus the current liabilities. • The more that assets are in the form of cash, the lower the amount of “liquid” working capital needed.

  4. Equity Capital vs Debt Capital DEBT CAPITAL EQUITY CAPITAL

  5. Guiding Beliefs in Determining Capital Policy • A rule of thumb is to have at least $1 of equity capital for every $2 of assets. • The investors/owners must have control over the corporation’s future. • Equity ownership should be held by the current investors.

  6. Working Capital Guidelines • A common guideline for measuring this working capital ratio is $2 of current assets for each dollar of current liabilities. The need for working capital will be affected by: • Permanent inventory levels • Number of locations or branches • Type of business

  7. Ways to Reduce Capital Needs “He who controls the capital controls the business.” • Consolidation • Pooling to reduce costs • Influences efficiencies • Joint Ventures • Between the business and other partners • Partner with firms with superior market strength • Gain access to markets rather than control the markets

  8. Ways to Reduce Capital Needs (slide 2) • Value-Added Ag Businesses are attempting to meet the challenge by: • Avoiding redundant capital use. • Areas where this is happening: • Sugar beet industry • Corn processing • Dairy industry • Citrus industry Primarily in the form of limited liability companies or cooperative businesses.

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