1. Conservative approach refers the working capital needs are primarily financed by long-term sources and the use of short-term sources may be restricted to unexpected and emergency situation.
2. Aggressive approach means the firm decide to finance a part of the permanent working capital by short-term sources.
3. Hedging approach means trade-off between conservative and aggressive approach.
4. Working capital leverage expresses the relationship between efficiency of working capital management and return on investment.
5. Over trading is an aspect of under capitalization, which means an attempt being made by business concern to increase value of operation with insufficient amount of working capital.
6. Under trading means improper utilisation of working capital. It is due to overcapitalisation.
7. Optimal Decisions : The decision which relate to physical inputs, outputs and other variables (i.e. non-financial variables).
8. Profit Maximisation : The term ‘profit maximization’ implies generation of largest amount of profits over the time period.
9. Wealth Maximisation : It refers to all the efforts put in for maximizing the net present value (i.e. wealth) of any particular course of action which is just the difference between the gross present value of its benefits and the amount of investment required to achieve such benefits.
10. Payback period. A method of evaluating investment proposal which determines the time a project's cash inflows will take to repay the original investments of the project.
11. Average rate of return. Also known as the accounting rate of return (ARK), return on investment (ROT) or return on assets (ROA), is obtained by dividingaverage annual post-tax profit by the average investment.
12. Discount rate. The rate at which cash flows are discounted. This rate may be taken as the requiredrate of return on capital, or the cost of capital.
13. Internal rate of return. The IRR is a method of evaluating investment proposals. It is that rate of discount (or interest rate) that equals the present value of outflows to the present value of inflows, thus making NPV=Q.
14. Mutually exclusive projects. A situation in which the acceptance of one investment proposal leaves out the acceptance of another proposal.
15. Net Present Value. A method of evaluation consisting of comparing the present value of all net cash flows (discounted by cost of capital as the interest rate) to the initial investment cost.
16. Capital rationing. When availability of capital to a firm is limited,-the firm is constrained in its choice of projects. Capital rationing is restricting capital expenditure to certain amount, even when projects with positive NPV need be rejected (which would be accepted in unlimited funds case).
17. Expected value (or expected monetary value). A weighted average of all possible outcomes, their respective probabilities taken as weights.
18. Pay-off. The monetary gain or loss from each of the outcomes.
19. Probability. A ratio representing the chance that a particular event will occur.
20. Probability distribution. A distribution indicating the chances of all possible occurrences.
21. Cost of capital. It is the rate of return the firm must earn on its assets to justify the using and acquiring of investible resources.
22. Weighted average cost of capital. Weights are given in proportion to each source of funds in the capital structure; then weighted average cost of capital is calculated.
23. Gross current assets means the aggregate of all current assets including cash
24. Net current assets means the aggregate of all current assets less current liabilities. This is same as working capital.
25. Fixed working capital is the amount that remains more or less permanently invested as working capital in business.
26. Fluctuating working capital is the amount of working capital over and above the fixed amount of working capital. It may keep on fluctuating from period to period depending upon several factors.
27. Current liabilities, which are due for payment in the short run, say one year.
28. Trade creditor is a source of funds available from the supplies, supplying the goods on credit.
29. Open account, which refers to supply of goods on credit. But the buyer does not sign any formal debt instrument evidencing the amount due.
30. Accrued expenses is a spontaneous source of short-term financing referred to the services availed by the firm, but the payment for which has not yet been made.
31. Spontaneous sources of funds are those, which occur and result from the course of normal business activity. The cost of these funds is almost nil.
32. Permanent sources of funds which are available to the company until the company is alive.
33. Short-term sources of funds, which are available to the company for less than 12 months.
34. Bank overdraft is a short-term source available to the customer. A customer can withdraw over and above the balance in the current account
35. Credit insurance - Insurance in case the customer fails to pay the invoice. In these situations payment for bad debts are received upto pre determined limits.
36. Factoring - Instant cash upon issuing invoices on sales ledger.
37. Non-recourse Factoring - If the customers fail to pay the invoices, the factors will pay. Hence we pay an additional charge to cover the credit insurance costs.
38. Recourse Factoring - If the customers fail to pay their invoices, the factors will look for reimbursement of any amounts advanced against the invoice. The service excludes bad debts protection.
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