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Title: Rental Property Investments

Author: Jennifer Bailey

When talking about Rental Property Investments, the term
'working capital' has to be understood. There are two concepts
of working capital: gross working capital and net working
capital. Gross working capital is the total of all current
assets. Net working capital is the difference between current
assets and current liabilities. It may be mentioned here that
though this concept of working capital is commonly used, it is
an accounting concept with little economic meaning. It makes
little sense to say that a firm manages its net working capital.
What a firm really does is to take decisions with respect to
various current assets and current liabilities.

The management of working capital refers to the management of
current assets as well as current liabilities. The major thrust,
of course, is on the management of current assets. This is
understandable because current liabilities arise in the context
of current assets. Working capital is a significant facet of
rental property investments because investment in current assets
represents a substantial portion of total investment. Moreover,
investment in current assets and the level of current
liabilities have to be geared quickly to changes in sales. To be
sure, fixed asset investment and long-term financing are also
responsive to variation in sales. However, this relationship is
not as close and direct as it is in the case of working capital

The importance of working capital management is reflected in the
fact that financial managers spend a great deal of time in
managing current assets and current liabilities. Arranging
short-term financing, negotiating favorable credit terms,
controlling the movement of cash, administering accounts
receivable and monitoring the investment in inventories consume
a great deal of time for financial managers.

In the management of working capital two characteristics of
current assets must be borne in mind. Firstly, short life span
and secondly, swift transformation into other asset forms.
Current assets have a short life span. The life span of current
assets depends upon the time required in the activities of
procurement, production, sales and the degree of synchronization
among them.

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