WORKING CAPITAL

WORKING CAPITAL
INVESTMENT POLICIES
INVESTMENT POLICIES
Presented by: ABUAN – ATIS – BIABILLA
 WORKING CAPITAL
• A firm's investment in short-term/current
assets
– Cash
– marketable securities
– Inventory
– accounts receivable
WORKING CAPITAL POLICY
• the level of investment in current assets for attaining
their targeted sales.
• need to closely monitor its working capital to achieve
optimal results
• 3 Types:
– Restricted
– Relaxed
– Moderate
 RESTRICTED POLICY
• “Aggressive working capital policy”
• Investment in current asset is low
• Current Asset estimation
is done very
aggressively.
• Saves interest cost due
to lower working capital
requirement.
 RELAXED POLICY
• “Conservative policy”
• Investment in current asset is high
• Current Asset estimation
is done after careful
consideration of various
factors.
• Advantage of no or low
risk.
 MODERATE POLICY
• Tread a middle path between restricted
and relaxed approaches.
• Risk is lower than the
restricted and higher
than relaxed.
• Reasonable assurance
of smooth operations.
What are the consequences of flexible and restrictive policies?
• A flexible policy results in fewer production
stoppages, ensures quick deliveries to
customers, and stimulates sales because liberal
credit is granted to customers.
• A restrictive policy, on the other hand, may lead
to frequent production
stoppages, delayed
deliveries to customers,
and loss of sales.
What dictates the investment policy to be
employed in a company?
• Nature of business
• Size of business or scale if its operation
• Production policy
• Manufacturing process or length of production cycle
• Seasonal variations
• Working capital cycle
• Rate of stock turnover
• Credit policy
• Business cycles
• Rate of growth of business
• Earning capacity and dividend policy
• Price level changes
• Other factors