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Working Capital Finance

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Working Capital Finance

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • April 3, 2021 at 10:20 pm #615862
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    Hello Sir! I am having another problem with working capital [I have seen all your lectures on working capital But unfortunately I still can’t prove in question whether the company is using short-term or long-term financing & whether the company should change its policy or not]

    I am aware Working capital financing policies can be classified into conservative, moderate & aggressive approaches [ thanks to ur lectures 🙂 ] and I know these approaches so u don’t have to mention them.

    BUT how can I see whether the company is using short-term financing or long-term financing with the help of ratios [just mention the name of ratio it will help enough]

    Lastly, please confirm me this is what I read somewhere which is really important for me to grasp [“Both Working Capital Investment & Financing Policies use the terms Conservative, Moderate & Aggressive”]

    April 4, 2021 at 9:17 am #615876
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    It is not a question of looking at ratios, but of examining the SOFP.

    If there is an overdraft, then that amount will be be being financed by short-term finance. If there is no overdraft then all of the amount will be being financed by long-term finance.

    Your last statement is correct 🙂

    April 4, 2021 at 5:55 pm #615927
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    I understood your last response Sir. But I want to be correct in these 3 statements whether these are true or not?

    1) It can also be said that in a conservative policy approach, the working capital (current assets – current liabilities) will be higher because there will be more current assets because of long-term investment in the non-current assets, but lesser current liabilities because we used long-term liabilities to finance our current assets

    However, aggressive approach will be where working capital is lower because we have used short-term financing policy to finance its current assets. So, current assets will be lower, but higher current liabilities since we have used short-term liabilities such as Bank Overdraft or Short-term loans etc

    2) In other words if there is a higher Current ratio (current assets / current liabilities) will indicate that the company has used long-term policy to finance its current assets. Therefore, it is a conservative policy that company has adopted.

    BUT if we have a lower Current ratio then it clearly indicate that company is utilizing short-term policy to finance in its current assets. Therefore, it is aggressive policy that is adopted by company.

    3) Is it true that we can use CURRENT RATIO [without any other ratio] to identify whether the company has used conservative or aggressive approach?

    Thanks for your time though 🙂

    April 5, 2021 at 9:22 am #615952
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Your first 2 statements are correct.

    For statement 3, just be careful how you word it – the current ratio will suggest (not prove 🙂 ) the approach the company is using.

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