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I’m confused between the policies for working capital financing & investment.
Is it true that working capital financing policies are conservative where Non-current assets are financed by long-term finance; Whereas in aggressive policy current assets are financed by short-term.
But I couldn’t get the conservative & aggressive working capital investment policies. Can you please make it understandable?
It is mentioned in the past question in June 2012 called Wobnig Co.
Non-current assets should always be financed by long-term finance.
As far as the working capital is concerned then the question is whether it should be financed by long-term capital (which is conservative) or by short-term capital (which is aggressive). I explain the arguments for both in my free lectures on the management of working capital.
As I also explain in my lectures, most sensible is to finance the long-term average level of working capital (the permanent working capital) from long-term finance, and to finance the day-to-day fluctuations (the temporary working capital) from short-term finance (e.g. overdraft finance).
Again, I do explain this in my lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
In the past question called Wobnig Co (June 2012). It has mentioned conservative & aggressive policies both in the working capital financing policy & investment policy. In the last paragraph, it said that working capital financing policy can be aggressive & at the same time working capital investment policy can be conservative but this is the point I do not understand.
I got your point in your last statement but it is in the context of working capital financing policy but not in investment policy. This is what I wanted to know!
Yes, I have already watched your lectures. 🙂
My last statement was about the financing – nothing to do with the investment policy and sorry, I had read your original question too quickly 🙁
The investment policy is referring to how much of the companies finances are invested in non-current assets and how much in current assets (working capital). Although it depends very much on the type of business, it is normal to try and keep working capital to a minimum so as to be able to invest more in non-current assets (because it is the non-current assets that actually generate the profits).
However keeping the working capital too low can be more risky – for example, operating a just-in-time policy keeps inventory levels very low, but creates more risk of running out of inventory.So, investment in non-current assets that earns profits would be a conservative policy whereas investment in working capital would be an aggressive policy.
Is that true?
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