Vous êtes sur la page 1sur 17

Addressing Working Capital

Policies and Management of


Short-term Assets
& Liabilities
Chapter 17
What is Working Capital Management?

Working Capital Management is associated with short-


term financial decision making. (Financial Management
Principles & Applications, 2015 Edition Volume 1).
Therefore, it involves the relationship between a firm’s
short-term assets and short-term liabilities.
The basic goal of working capital management is to
ensure that a firm os able to continue its operations and
that it has sufficient ability to satisfy both maturing short-
term debt and upcoming operational expenses.
How can Operating Cycle be reduced?

Production Management
Purchasing Management
Marketing Management
Credit and Collection Policies
External Environment
Some Aspects of Short-term Financial Policy

The Working Capital or short-term financial policy that a


firm adopts involves answering two basic questions.

What is the appropriate size of the firm’s investment in


current assets?
How should the current assets be financed?
Alternative Policies as to the Size of
Investment in Current Assets
There are atleast three alternatives policies regarding the
total amount of current assets carried:

Relaxed Current Asset Investment Policy


This is a policy under which relatively large amounts of
cash, marketable securities, and inventories are carried
and under which sales are stimulated by granting liberal
credit terms resulting in a high level of recievables. In this
policy marginal carrying costs of current assets will
increase while marginal shortage costs will decrease.
Alternative Policies as to the Size of
Investment in Current Assets

Restricted Current Asset Investment Policy

This is policy under which holdings of cash, securities,


inventories and receivables are minimized. Marginal
carrying costs of current assets will decrease while
marginal shortage costs will increase.
Alternative Policies as to the Size of
Investment in Current Assets

Moderate Current Asset Investment Policy

This is policy that is between the relaxed and restricted


policies. This policy dictates that the firm will have just
enough current assets so that the marginal carrying costs
and marginal shortage costs are equal, thereby minimizing
total cost.
Alternative Strategies in Financing
Working Capital

Effective working capital management requires a set of


strategies to manage the level, composition and financing
of a firm’s assets:

Long-Term/Permanent Assets
These consist of property, plant and equipment, long-
term investments and the portion of a firm’s current assets
that remain unchanged over the year.
Alternative Strategies in Financing
Working Capital

Fluctuating/Seasonal Assets

These are current assets that vary over the year due to
seasonal or cyclical needs.
Flexible Financing Policy

This involves the decision to finance the peaks of assets


requirement with long-term debt and equity. It provides
the firm with a large investment surplus in cash and
marketable securities most of the time.
Restricted Financing Policy

This involves a decision to finance the valleys or troughs


of asset, with long-term debt and equity but will have to
seek short-term financing for all peak demand situation.
This policy is considered the most “conservative” but the
least convenient because it involves seeking some level
of short-term financing almost all of the time.
Compromise Financing Policy

This involves a firms financing the seasonally adjusted


average level of asset demand with long-term debt and
equity. It uses both both short-term financing and short-
term investing as needed. With this compromise
approach, the firm borrows in the short-term to cover
peak financing needs but it maintains a cash reserve in
the form of marketable securities during slow period. As
current assets build up, the firm draws down this reserve
before doing any short-term borrowing.
Which Financing Policy should be chosen?

There is no definite answer, however, the following should be


considered in analyzing the advantages/disadvantages of the
alternative financing policy for working capital:

Maturity Hedging;
Cash Reserves;
Relative Interest Rates;
Availability of Costs of Alternative Financing;
Impact of Future Sales;
CASE STUDY ANALYSIS

Vous aimerez peut-être aussi