How do we manage net working capital effective?

1. maintaining liquidity (i.e. ease of converting an asset into cash)
2. the need to earn the required rate of return on assets for investors  (working capital that is too high reduces return on equity)
3. the cost and risk of short-term funding (current liabilities)

What are the management techniques?

• To achieve an appropriate level of net working capital many firms use the hedging principle
• This means matching the maturity of the source of funding with its use or cash flows
• To make the hedging principle more useful, it is useful to think in terms of different 3 different sources of funding

There are three sources of funds: 

• Permanent sources
• funding with maturities > I year 

e.g. long term debt, leases, shares

• Temporary sources
• short term finance

e.g. bank loans, commercial bills

• Spontaneous sources
• unplanned or unstructured funding 

e.g. trade creditors, accrued expenses

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