Comment, question or quotation of the day

22-10-2019 : Question from an ICCF@Columbia Business School participant.

  Considering investment as an immediate deprivation of liquidity pending a greater liquidity in the future, I would like please more explanations on how working capital is an investment. In this case, can a receivable (a working capital element) generate more liquidity than its carrying amount? This is easier to understand with an example. You buy 100 of raw materials in month 1 and pay cash. You process these raw materials in month 2 with 60 of wages that you pay cash, and you sell your widgets in month 3 for 180 that are paid to you in month 4. You therefore had to invest 100 in the first month, investment increased to 160 in the second month and you receive 180 in the 4th month. The working capital therefore corresponds in this example to a renunciation of immediate liquidity (of up to 160) in favour of higher and subsequent liquidity (180). What prevented you from seeing this situation was the too fine a level of your analysis, at the level of the components of the working capital and not at the overall level of the working capital. Have a good day  

21-10-2019 : Quote of the day

“Believing that specialists in financial arrangements have suddenly become infallible, amounts to doubting the law of universal gravitation.”    Wilbur Ross


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The Letter

Number 123 of October 2019

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