 Definition

3 Types of Working Capital Management

 Policies
 Assets
 Approaches
 Conclusion of Approaches
 Past Semester Questions Related To This
Topic
 TO BE ABLE TO UNDERSTAND THE POLICIES IN
WCM
 TO BE ABLE TO UNDERSTAND THE STRATEGIES
IN WCM
Traditionally, working capital is defined as the firm’s total
investment in current assets.

The working capital management involves day to day decisions

regarding investment in current assets and how the assets are to
be financed.

This entails managing two related aspects of the firm’s operation:

 It is investment in current assets which consists of cash,

marketable securities, accounts receivable, inventories and
other assets that the firm’s manager expected to converted to
cash within a period of a year or less.

 Its use of short term or current liabilities such as notes payable

which payable in a year or less.
The primary purposes:
• To review alternative strategies for investing in working
capital.
• To discuss alternative strategies for financing working
capital.

Thus, decision in these two areas will affect both the firm’s
riskiness and its expected rate to return and its market
values.
 WORKING CAPITAL MANAGEMENT

• Relaxed policy • Permanent • Hedging

• Restricted assets Approach
policy • Temporary • Aggressive
• Moderate policy Assets Approach
• Conservative
Approach
 RELAXED POLICY RESTRICTED POLICY
 Low risk policy.  High risk policy.
 Firm maintain large amount of  Reduce current assets, holding to a
current assets coupled with minimum coupled with stringent credit
liberal or flexible credit policy.
policies.  Lower liquidity
 High liquidity.  Higher return because investment in fixed
 Low return of investment due assets (productive assets).
to low productivity of current
assets relative to fixed assets. MODERATE POLICY

 Combination of restricted and relaxed policies.

 Moderate risk and return.
 High current assets investment – under relaxed policy – reduced risk of technical
insolvency, thus it will result in lower return due to lower productivity of current
asset.
 Investment in current asset should be at a minimum level without sacrifice the
liquidity requirement.
 PERMANENT ASSETS TEMPORARY ASSETS

 It refers to all assets, fixed or  Refers to part of current

current, that necessary for the firm assets that fluctuates directly
to hold at all time regardless of the with changes in sales level.
firms sales level.  Current assets that fluctuate
 Fixed asset are permanent in nature with seasonal of cyclical
since it is inflexible in the short variation in a firms business.
term.
 Must hold certain amount of current
asset to support operation, such as
amount of cash.
 HEDGING APPROACH

 This approach involve a policy that matches assets and liabilities

maturities.
 Has moderate risk with moderate return. (Moderate risk approach).
 As conclusion, firm use short term financing to finance temporary
current assets while long term financing to finance permanent
current assets and fixed assets.
 THE HEDGING APPROACH
Ringgits
Short-term or
Temporary
financing.

TCA
Long-term
PCA or
Permanent
+
Spontaneous
financing

Fixed assets

Time
Where TCA : Temporary current assets
PCA : Permanent current assets
 AGGRESSIVE APPROACH

 This approach involve partially matches the maturity of assets and liabilities.
 Has higher risk with higher return. (Higher risk approach). Thus, it is riskier for
the firm because the current ratio is less than one and there are potential
problems in renewing the short-term borrowing arrangement.
 It uses short-term or temporary financing to finance some permanent current
assets.
 Its also finance all fixed assets with long term financing, but only a portion of
the permanent current assets would be financed by long term financing.
 The remaining permanent and fluctuating temporary current assets would be
financed by short-term borrowing.
 THE AGGRESSIVE APPROACH
Ringgits

Short-term
or
Temporary
financing

TCA
Long-term
PCA or
Permanent
+
Spontaneous
financing
Fixed assets

Time
Where TCA : Temporary current assets
PCA : Permanent current assets
 CONSERVATIVE APPROACH

 Has lower risk with lower return. (Lower risk approach)

 Short term financing only at peak requirements.
 The firm uses long term financing for the majority of its assets.
 The firm supports fixed, permanent and temporary current
assets with long term financing.
 THE CONSERVATIVE APPROACH
Short-term
Ringgits Marketable
or
securities
Temporary
financing

Long-term
TCA or
Permanent
PCA +
Spontaneous
financing

Fixed assets

Time

Where TCA : Temporary current assets

PCA : Permanent current assets
CLASSIFICATION OF A FIRM’S DEFINITIONS AND EXAMPLES
SOURCES OF FINANCING
Definition: Current liabilities other than
spontaneous sources of financing.
Temporary Financing
or Short Term Example: Notes payable and revolving
credit management that must be repaid in
period less than 1 year.
Definition: Long-term liabilities and
payable more than 1 year and equity
Permanent Financing financing.
or Long Term
Example: Term loans, notes and bonds as
well as preferred and common equity.
Definition: Financing that arise more or
less automatically in response to purchase
Spontaneous Financing of an assets.
or Long Term
Example: Trade credit that companies
purchase of inventories and other types of
account payable created by purchase of
services.
Hedging Approach
Short-Term Financing will covers Temporary Current Assets.
Long-Term Financing will covers Fixed Assets and Permanent
Current Assets.

Aggressive Approach
Short-Term Financing will covers Temporary Current Assets and a
portion of Permanent Current Assets.
Long-Term Financing will covers Fixed Assets and a portion of
Permanent Current Assets.

Conservative Approach
Short-Term Financing will covers a portion of Temporary Current
Assets.
Long-Term Financing will covers Fixed Assets, Permanent Current
Assets and a portion of Temporary Current Assets.
1. June 2019, Part B (Question 5b)
Draw a diagram and describe the aggressive approach in the working
capital management.
(8 marks)
2. December 2018, Part B (Question 5b)
Describe any two (2) working capital approaches with the aid of
diagram for each approach.
(8 marks)
3. June 2018, Part B (Question 5b)
Describe the three (3) basic investment policies:
i) Relaxed Policy (3 marks)
ii) Moderate Policy (3 marks)
iii) Restricted Policy (2 marks)
4. January 2018, Part B (Question 4c)
Describe any two (2) basic working capital policies.
(4 marks)
5. March 2017, Part B (Question 4b)
Explain the Hedging Approach in working capital management using a
graph.
(4 marks)