CHAPTER 10 (2)
WORKING CAPITAL
MANAGEMENT
Working Capital Management
2
Involves day-to-day decisions regarding investment in
current assets, and how the assets are to be financed.
The primary purpose:
1. To review alternative strategies for investing in working
capital , and
2. To discuss alternative strategies for financing working
capital.
SITI AISHAH BINTI KASSIM (FM1)
Current Assets Investment Policies
3
Relaxed Policy
1.


A low risk policy; whereby the firm will maintain large amount of
current assets coupled with liberal credit policy.
It has high liquidity, and potentially low return from investments.
2. Restricted Policy


A high-risk policy; whereby it reduces currents holding to a minimum
coupled with stringent credit policy.
Lower investments in current assets by increase investment in other
productive investment and thus, give results in higher returns.
3. Moderate Policy


Between relaxed and restricted policies.
It will results in moderate risk and returns.
SITI AISHAH BINTI KASSIM (FM1)
Working Capital Strategies
4
 It range from the aggressive to the conservative approach, in which




each will produce different levels of profitability and risk exposure.
Aggressive policy approach sacrifices safety or liquidity for return.
Conservative policy sacrifices return for safety.
Firms normally has production and sales cycles that vary during the
course of its operations; which will cause the current assets of the firm
to fluctuate over time.
Certain assets are temporary in nature and others are permanent:


Permanent Assets – it refers to all assets, fixed or current, that are
necessary for the firm to hold at all time regardless of the firm’s sales level.
Fixed assets are permanent in nature since it is inflexible in the short-term.
Temporary Assets – it refers to part of current assets that fluctuates
directly with changes in sales level.
SITI AISHAH BINTI KASSIM (FM1)
Hedging Approach
5
 Focusing on how to manage current liabilities.
 Matches the maturity of assets and liabilities that is the firm uses
temporary financing to finance temporary current assets and
permanent financing to finance permanent assets.
Ringgits
Short-term or
temporary financing
TCA
Permanent +
Spontaneous financing
PCA
FA
Time
SITI AISHAH BINTI KASSIM (FM1)
Aggressive Approach
6
 Modification from hedging approach.
 Involves more risk, as it partially matches the maturity of assets and
liability. It uses ST financing or temporary financing to support a
relatively large portion of current assets.
Ringgits
Short-term or
temporary financing
TCA
Permanent +
Spontaneous financing
PCA
FA
Time
SITI AISHAH BINTI KASSIM (FM1)
Conservative Approach
7
 Has a lot of liquidity (cash).
 Has the lowest risk among the working capital approaches; whereby the
firm uses LT financing for the majority of its assets; resorting to the use
of ST financing only for the very peak requirements.
Ringgits
Marketable
Securities
Short-term or
temporary financing
TCA
Permanent +
Spontaneous financing
PCA
FA
Time
SITI AISHAH BINTI KASSIM (FM1)
8
THE END
SITI AISHAH BINTI KASSIM (FM1)