Working Capital Policy involves

Two Basic Decisions:

WORKING CAPITAL
DECISIONS

Level of Manner of
investment in financing
current assets working capital

8.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Working Capital Financing
Policies
LEVEL OF INVESTMENT IN CURRENT ASSETS
✓ Relaxed/Loose Current Asset Investment
✓ Restricted/ Tight Current Asset Investment
✓ Moderate Current Asset Investment

MANNER OF FINANCING WORKING CAPITAL

✓ Aggressive Strategies/Policies
✓ Moderate/Maturing Strategies/Policies
✓ Conservative Strategies/Policies

8.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Working Capital
Needs of Different Firms

8.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Permanent and
Temporary Working Capital
Working capital is permanent to the extent that it
supports constant or minimum level of sales
There is always a minimum level of CA which is
continuously required by a firm to carry on its
business operations.
Therefore , the minimum level of investment in CA
that is required to continue the business without
interruption is referred as permanent working
capital.

8.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Permanent and
Temporary Working Capital
Temporary working capital supports seasonal
peaks in business

This is the amount of investment required to take

care of fluctuations in business activity or needed
to meet fluctuations in demand consequent upon
changes in production and sales as a result of
seasonal changes.

8.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 DISTINCTION
Permanent is stable over time whereas variable is
fluctuating according to seasonal demands.
Investment in permanent portion can be predicted with
some profitability but investment in variable can not be
predicted easily.
Ideally, permanent capital requirements should be
financed from L-T sources, but, S-T funds should be
used to finance temporary working capital needs of a
firm.

8.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Working Capital Financing
Policies

8.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Working Capital Financing
Policies

8.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Maturity Matching (or
Hedging) Approach
A method of financing where each asset would be offset with
a financing instrument of the same approximate maturity.

Short-term financing**
PESO AMOUNT

Current assets*

Long-term financing
Fixed assets

TIME
8.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financing Needs and
the Hedging Approach
• Fixed assets and the non-seasonal portion
of current assets are financed with long-
term debt and equity (long-term profitability
of assets to cover the long-term financing
costs of the firm).
• Seasonal needs are financed with short-
term loans (under normal operations
sufficient cash flow is expected to cover the
short-term financing cost).
8.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.