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I have watched your lecture on Working Capital but I got few questions related. Please answer them! 🙂
Is it correct that Short-term Finance can be raised by Overdraft (from Bank) & delaying Payables (to suppliers)?
While Long-term Finance can be raised by Equity (Shares & Retained Earnings) & Non-current Liabilities (Loan & Bonds)
How do we know whether the company is going to invest short-term borrowing in the short-term term assets or long-term assets? [Same thought goes for long-term borrowing]
Please do correct these points:
1) An increase in current assets along with the increase in short-term borrowing would indicate that the company has invested short-term borrowing in its current assets?
2) An increase in fixed assets along with the increase in long-term borrowing would indicate that the company has invested long-term borrowing in its fixed assets?
3) What if the company has increased short-term borrowing + increased in long-term borrowing in the question then is there any way to identify whether the company is using its short-term borrowing for current assets and long-term for fixed assets? Confused here!
Compare the increase in the non-current assets with the increase in the long-term borrowings.
If the long-term borrowings have increased more, then the extra must have been invested in working capital.
If the non-current assets have increased more, then the extra must have come from short-term borrowings.
Sir, you did not comment on this:
Is it correct that Short-term Finance can only be raised by Overdraft (from Bank) & delaying Payables (to suppliers)?
While Long-term Finance can only be raised by Equity (Shares & Retained Earnings) & Non-current Liabilities (Loan & Bonds)
Again, Is it possible in the exam that we will be given that the company having both increase short-term borrowing with the increase in long-term borrowing?
As u said that a company can use long-term borrowing for both Fixed Assets & Current Assets and vice versa for short-term borrowing then how would be able to identify whether the company is using aggressive policy or conservative policy based on that? [can we be asked in exam that company is using aggressive policy or conservative policy by using calculation or we just have to define them in theory only without any calculation?]
Yes to each of your first three sentences.
The more that working capital is financed by long-term capital then the more conservative their financing policy is.
The more it is financed by short-term borrowings, then the more aggressive their financing policy is.
You can be asked to describe in words the different policies and you could also be asked to suggest whether they appear to be more conservative or more aggressive by looking at the SOFP’s.
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