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Working Capital Management and Strategies

This chapter discusses the day-to-day decisions involved in working capital management, including investment in current assets and financing strategies. It explores different investment policies and working capital strategies that can impact profitability and risk exposure.

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Working Capital Management and Strategies

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  1. CHAPTER 10 (2) Working capital management

  2. Working Capital Management Involves day-to-day decisions regarding investment in current assets, and how the assets are to be financed. The primary purpose: • To review alternative strategies for investing in working capital , and • To discuss alternative strategies for financing working capital. SITI AISHAH BINTI KASSIM (FM1)

  3. Current Assets Investment Policies • Relaxed Policy • 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. • 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. • Moderate Policy • Between relaxed and restricted policies. • It will results in moderate risk and returns. SITI AISHAH BINTI KASSIM (FM1)

  4. Working Capital Strategies • 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)

  5. Hedging Approach • 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)

  6. Aggressive Approach • 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)

  7. Conservative Approach • 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)

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