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In question Wobnig Co (June-12), it says that it is possible for a company to have an aggressive financing working capital policy with the conservative investment working capital policy.
I know that Working Capital Financing Policy looks at how much of the working capital is financed through short-term & long-term borrowings (I have no problem here) BUT I’m afraid that I don’t know Working capital investment policy and how to look for that in the company’s financial statement?
Is it true that to see the working capital investment policy we have to see how much finance the company has put into their working capital so it is correct to say that:
1) If the company is having higher Working Capital that means increase in the level of receivables, inventories and decrease in payables from year to another.
[This shows that the company has adopted Conservative Investment Policy and has inclined towards Liquidity therefore it is an overcapitalization into the Working Capital]
2) If the company is having lower Working Capital that means decrease in the level of receivables, inventories and increase in payables from year to another.
[This shows that the company has adopted Aggressive Investment Policy and has inclined toward Profitability therefore it is an overtrading into the Working Capital]
Have a good day SIR.
The investment policy is looking to see if the working capital is higher than it should be for the type of company (in which case it is conservative) or lower than it should be (in which case it is aggressive).
The only way we can examine this is by comparing with companies in the same businesses. Comparing from year to year is not really checking on this.
The investment policy is looking to see if the working capital is higher than it should be for the type of company (in which case it is conservative) or lower than it should be (in which case it is aggressive).
The only way we can examine this is by comparing with companies in the same businesses. Comparing from year to year for the same company is not really checking on this.
Thanks for your reply it was a great help.
Sir can you please say to see if the company is having higher or lower working capital we can identify this by looking at these levels:
1) Higher Working Capital which means increase in the level of receivables, inventories and decrease in payables as compared to another company in the same sector
This shows that the company has adopted Conservative Investment Policy and has inclined towards Liquidity therefore it is an overcapitalization into the Working Capital
2) Lower Working Capital which means decrease in the level of receivables, inventories and increase in payables as compared to another company in the same sector
This shows that our company has adopted Aggressive Investment Policy (i.e. Overtrading in Working Capital) and the company is more inclined towards Profitability objective
Thanks for your reply it was a great help.
To see if the working capital is HIGHER or LOWER we have to look at the factors mentioned below such as:
1) If the company is having higher Working Capital: This can be identified by increase in the level of receivables, inventories and decrease in payables as compared to another company in the same sector.
[This shows that our company has adopted Conservative Investment Policy (i.e. Overcapitalization in Working Capital) and the company is more inclined towards Liquidity objective]
2) If the company is having lower Working Capital: This can be identified by decrease in the level of receivables, inventories and increase in payables as compared to another company in the same sector.
[This shows that our company has adopted Aggressive Investment Policy (i.e. Overtrading in Working Capital) and the company is more inclined towards Profitability objective]
Please correct me on these two problems of mine. I would be grateful to you 🙂
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