1.

Appraise a range of approaches to managing working capital in an organization

(P4)
Determining the sources of funding involves developing working capital policies. It also affects
how these funds are distributed between current assets and liabilities. In general, aggressive and
cautious tactics, depending on the degree of risk involved, may help a corporation finance its
working capital more effectively (Borad, 2022)
- Aggressive (restrictive) approach
An assertive working capital strategy is characterized by a deliberate attempt by firms to
minimize their investment in current assets while relying heavily on short-term credit. The
objective is to maximize the utilization of funds in order to reduce the duration required for the
production of goods, the rotation of inventory, or the provision of services. Accelerating the
business cycle results in an increase in sales and revenue. According to Eric (2019), corporations
tend to maintain minimal cash reserves, minimize the stock of slow-moving inventory and
superfluous supplies, and prolong the duration of bill payments.
Organizations with a goal of achieving rapid growth may choose to adopt this particular working
capital strategy. Nevertheless, due to the significant level of risk involved, possessing robust
business acumen and adept financial management skills are crucial.
- Conservative (Flexible) approach
An organization employs this approach solely when it seeks to minimize risk to the greatest
extent possible. This policy entails stringent regulation of credit limits by the management to
mitigate risk. Furthermore, it is customary for current assets to exceed current liabilities in order
to ensure adequate liquidity. Long-term funding options are predominantly employed by
organizations to finance both fixed and variable current assets. The utilization of short-term
sources is limited to a negligible extent for low-risk purposes (KredX, 2020).
Hence, implementing a conservative approach to working capital financing may mitigate the
likelihood of encountering a shortfall in cash in the short run. However, this strategy may result
in suboptimal utilization of available funds, leading to a decrease in profitability and impeding
the growth of the organization. company. Enterprises operating in industries that are susceptible
to fluctuations or seasonal variations, such as tourism, agriculture, or construction, may opt for
cautious working capital strategies as a means of mitigating risk.
2. Evaluate different techniques for measuring the working capital position of an
organization (P5)
- EOQ
The acronym EOQ denotes the economic order quantity, which is a mathematical expression
utilized to ascertain the most advantageous quantity and frequency of inventory ordering. The
objective of the EOQ model is to minimize the overall expenses associated with inventory
management, which include expenses related to storage, delivery, and stockouts (Harbour, 2019).
Advantages
Reducing inventory costs and enhancing cash flow are two advantages of implementing the EOQ
model for business. Companies can prevent overstocking or understocking inventory, which may
result in waste, spoilage, or missed sales, by determining the ideal order amount and timing.
Additionally, purchasing and holding expenditures like shipping, handling, and storage rent may
be reduced for businesses. The EOQ model may also aid in streamlining the purchasing
management process and making it more reliable and consistent.
Disadvantages
The EOQ model is subject to a primary limitation, namely, its assumption that demand, costs,
and lead time for inventory are constant and known. This assumption may not be realistic in
certain circumstances. For instance, if demand fluctuates due to factors such as seasonality,
promotions, or market changes, the EOQ model may not be able to accurately determine the
optimal order quantity and timing. Tarver (2022) notes that the EOQ model may not accurately
reflect the costs associated with ordering and holding inventory in cases where there are
variations in costs or lead time due to factors such as supplier issues, transportation delays, or
discounts.
- JIT
Just-in-Time (JIT) is an inventory management approach that emphasizes minimizing the amount
of inventory stored on-site. Rather than accumulating large quantities of products and raw
materials, companies opt for ordering smaller shipments to replenish their inventory in
accordance with their demand forecasting and order fulfillment processes. The implementation
of Just-in-Time (JIT) is exemplified in the operations of grocery stores, as noted by Baluch
(2023).
Advantages
The implementation of Just-in-Time (JIT) inventory management enables companies to curtail
waste by eliminating surplus inventory and overstocking, both of which can incur significant
costs and occupy substantial storage space. The implementation of the Just-In-Time (JIT)
inventory technique can lead to a reduction in losses incurred from defective products by
facilitating their identification and resolution due to low production volumes. Additionally, JIT
can enhance productivity by reducing the time and resources required for manufacturing.
Furthermore, the faster turnaround of stock resulting from JIT can lead to a decrease in the
amount of warehouse or storage space required for goods. The implementation of JIT inventory
management results in a reduction in the required storage capacity, thereby enabling
organizations to allocate their financial resources to other business areas. This approach is
particularly beneficial for smaller companies that lack the financial means to procure large
quantities of inventory in a single transaction (CFI, 2022).
Disadvantages
The successful implementation of JIT requires companies to effectively monitor sales and
forecast customer demand in order to mitigate the risk of inventory depletion. The Just-In-Time
(JIT) approach is highly dependent on the reliability and consistency of the supply chain. The
potentiality of the company facing adversity is contingent upon the supplier's financial stability.
The absence of control over the time frame can pose a significant challenge for companies as
they are compelled to depend on the punctuality of suppliers for every order, thereby exposing
themselves to the possibility of impeding the timely delivery of goods to customers. Additional
planning is necessary. In the context of JIT inventory management, it is crucial for companies to
possess a comprehensive understanding of their sales patterns and deviations. Many corporations
experience seasonal fluctuations in sales, which necessitate maintaining a greater inventory of
specific items during certain periods of the year to meet increased consumer demand. Hence, it is
imperative for organizations to incorporate this aspect while strategizing for inventory
management, by guaranteeing that suppliers possess the capability to fulfill varying volume
demands during different periods (Banton, 2023).
3. Review factors that influence investment decision-making to recommend alternative
investment appraisal techniques (P6).
The act of allocating financial resources is commonly referred to as investment decision. When
engaging in investment activities, investors are required to consider a multitude of factors,
ranging from subjective to objective, in order to make informed and effective investment
decisions that yield favorable outcomes and advantages. Primarily, the paramount objective is to
mitigate potential hazards that could potentially impact the welfare of investors (Pettinger, 2021).
The subsequent factors may be cited as influential in the process of investment decision making:
- Inflation rate
When returns outpace the nation's inflation rate, investors search for investment possibilities in
financial management. The pace of inflation over the long term may have an impact on
investment choices. High inflation causes financial market volatility, which tends to breed doubt
and apprehension about future investment expenses. Businesses will be unsure about the
eventual costs of project investments if inflation is large and unstable. They can also be
concerned about excessive inflation since it might result in future economic instability and a
recession. Long periods of steady, low inflation have been associated with greater investment
rates. Low inflation won't be sufficient to encourage investment if it results from a decline in
demand and economic growth. Low inflation and steady growth are ideal (Vietcap, 2023).
- Cost of capital
Analysts and investors evaluate the prospective return on an investment based on its expenses
and risks using the cost of capital. Financial analysts and businesses use the cost of capital to
assess how well money is invested. Investment choices made by a company for new projects
should always provide a return higher than the cost of capital required to fund the project. If not,
the project won't bring in money for the investors. Due to their impact on the return on the
company's assets and the risks taken to generate that profit, reinvestment choices have an impact
on the cost of capital as well as other facets of financial policy.
4. Calculate investment viability using different investment appraisal techniques to
inform long-term investment decision-making (P7).
Project 1: Suppose company ABC invests $500,000 in a project. The project made $100,000 in
revenue the following year. For five years, that sum increases by $80,000 each year. The cost of
capital is 15% for this project. The actual and expected cash flows of the project are as follows:
 => IRR = 24%
It means investors can expect to recover the initial capital at 24% per year over the life of the
investment.

References