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Sir, there is a question (Wobnig Co – June 2012) where I’d like to know whether the Wobnig Co has adopted Conservative Policy or Aggressive Policy in Working Capital Investment Policy and Working Capital Financing Policy.
Since the Company has raised $16,268 from Long-term Finance and $4365 from Short-term Finance;
1) Where the investment of 81.6% in CA from Short-term Finance and investment of 18.4% in CA from Long-term Finance;
2) However, NCA is invested 100% from Long-term Finance;
3) So, it can be said that Wobnig Co has adopted Aggressive Working Capital Investment Policy since most of the CA investment is majorly done by short-term finance.
[This is Working Capital Investment Policy above that I asked you about BUT can you please tell me how to evaluate Working Capital FInancing Policy?]
4) Since Working Capital Financing Policy & Working Capital Investment are two different things.
5) If NCA is financed by Long-term Finance it is Conservative WC FInancing Policy
6) If CA is financed by short-term Finance it is Aggressive WC Financing Policy
I cannot remember what I might have replied to you previously, but may I confused you.
Here, in 2011, there is long-term finance of 16,268.
15,284 is being used to financial non-current assets, which leaves 984 to finance the working capital. The rest of the working capital (1,500) is being financed by short-term borrowing.Were this a deliberate policy then it would be a very aggressive financing policy because the working capital is being mainly financed by short-term finance. (Here is not their policy, the overdraft has been forced on them by the overtrading and they should have raised more long-term finance.
As far as the investment policy is concerned, this is looking at the level of the working capital (not how it is being financed). To investigate this you would compare with another company in a similar business and look at things like receivables days, inventory days, payables days. If our company has lower levels of working capital that it would be aggressive, if it had higher levels then it would be conservative.
[Working Capital Financing Policy]
WC Financing Policy can be identified by looking How much the business has raised its Short-term and Long-term Finance from one year to the another. To see whether the company is relying on Short-term Borrowings or Long-term Borrowings.In 2011, Wobnig Co has Short-term Finance of $4,365 and Long-term Finance of $16,268 and Total Finance would be $20,633
In 2010, Wobnig Co has Short-term Finance of $1,887 and Long-term Finance of $15,541 and Total Finance would be $17,428[Short-term Finance is increased by (4365 – 1887) / 1887 = 131%]
[Long-term Finance is increased by (16268 – 15541) / 15541 = 4.6%]Therefore, it can be concluded that company has adopted Aggressive Financing Policy because more of the finance is raised by Short-term Borrowings.
[Working Capital Investment Policy]
WC Investment Policy can be identified by looking How much proportion of the Short-term Finance and Long-term Finance is invested in the Current Assets (i.e. Working Capital)[In 2011, Wobnig Co’s has total Current Assets of $5,349 and Non-current Assets of $15,284]
Wobnig Co has invested $4,365 in its Current Assets from Short-term Finance which in proportion would be 81.6% (4365 / 5349) x 100 = 81.6%. However, The rest of the Investment of $984 in Current Assets has come from Long-term Finance which in proportion would be 18.4% (984 / 5349) x 100 = 18.4.
[BUT all the Long-term Finance of $15,284 is invested in the NCA]
Since most of Investment in Current Assets are invested from Short-term Finance so it is (4365 / 5349) x 100 = 81.6%.
Therefore, it can be concluded that company has adopted Aggressive Investment Policy because more of the CA is raised by Short-term Borrowings.
Is that all correct? Thanks for your help I really appreciate that… 🙂
What you have written about the financing is fine (and what you have written under investment policy is fine except for the fact it is not looking at the investment policy – it is looking at the financing policy).
For the investment policy we are not looking at where the finance came from (that is the financing policy) but at whether the level of working capital is higher or lower than similar companies. We cannot do that for this question because we have no information about similar companies. If we did have then we would have looked at the sort of ratios that I mentioned in the previous reply.
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