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The roles of financial institutions and markets.
WORKING CAPITAL MANAGEMENT The third major question concerns working capital management. The phrase working capital refers to the difference between a firm’s short- term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers. Managing the firm’s working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions. This involves a number of activities, all related to the firm’s receipt and disbursement of cash.
Some of the questions about working capital that must be answered are: (1) How much cash and inventory should we keep on hand? (2) Should we sell on credit? If so, what terms should we off er, and to whom should we extend them? (3) How do we obtain any needed short-term fi nanc- ing? Will we purchase on credit or borrow short-term and pay cash? If we borrow short-term, how and when should we do it? Th is is just a small sample of the issues that arise in managing a fi rm’s working capital.
Th e three areas of corporate fi nancial management we have described—capital budgeting, cap- ital structure, and working capital management—are very broad categories. Each includes a rich variety of topics; we have indicated only a few of the questions that arise in the diff erent areas. Th e following chapters contain greater detail.
1. What is the capital budgeting decision?
2. Into what category of financial management does cash management fall?
3. What do you call the specific mixture of short-term debt, long-term debt, and equity that a firm chooses to use?