Explain about working capital funding policy, Financial Management

Assignment Help:

When considering how working capital is funding it is useful to divide assets into permanent current assets, noncurrent assets and fluctuating current assets. Permanent current assets symbolize the core level of working capital investment needed to support a given level of sales. As sales raise this core level of working capital also increases. Variable current assets represent the changes in working capital that arise in the normal course of business operations for example when some accounts receivable are settled later than expected or when inventory moves more slowly than planned.

The matching principle proposes that long-term finance should be used for long-term assets. In a matching working capital funding policy consequently long-term finance is used for both permanent current assets and non-current assets. Short-term finance is utilized to cover the short-term changes in current assets represented by fluctuating current assets.

Long-term debt has a higher cost in comparison of short-term debt in normal circumstances for instance because lenders require higher compensation for lending for longer periods or because the risk of default increases with longer lending periods. Though long-term debt is more secure from a company point of view than short-term debt since provided interest payments are made when due and the requirements of restrictive covenants are met terms are fixed to maturity. Short-term debt is riskier in comparison long-term debt because for example an overdraft is repayable on demand and short-term debt may be renewed on less favourable terms.

A conservative working capital financial support policy will use a higher proportion of long-term finance than a matching policy thus financing some of the fluctuating current assets from a long-term source. This will be less risky as well as less profitable than a matching policy and will give rise to occasional short-term cash surpluses.

An forceful working capital funding policy will use a lower proportion of long-term finance than a matching policy financing some of the permanent current assets from a short-term source such as an overdraft. This will be more risky as well as more profitable than a matching policy.

Other factors that manipulate a working capital funding policy include management attitudes to risk and previous funding decisions and organisation size. Management attitudes to risk will conclude whether there is a preference for a conservative an aggressive or a matching approach. Previous financial support decisions will determine the current position being considered in policy formulation. The dimension of the organisation will influence its ability to access different sources of finance. A small company for instance may be forced to adopt an aggressive working capital funding policy for the reason that it is unable to raise additional long-term finance whether equity of debt.


Related Discussions:- Explain about working capital funding policy

Illustrate the term quality of benefits, Illustrate the term quality of ben...

Illustrate the term quality of benefits It is clear from Table that total returns associated with two alternatives are identical in a normal situation but range of variati

Case let 1, which type of approaching to each firm

which type of approaching to each firm

Financial maket, knowledge of financial market is power discuss

knowledge of financial market is power discuss

Explain foreign equity ownership restrictions, Explain foreign equity owner...

Explain foreign equity ownership restrictions. Why do you think countries entail these restrictions? Several countries restrict the maximum fractional ownership of local organiza

BCF103 - Fundamentals of Business Financial Management, The TERRIER program...

The TERRIER program cost estimate is in constant FY 2011 dollars, while the SPANIEL program cost estimate is in constant FY 2014 dollars. what is the most valid way of comparing th

Emerging market bonds, Emerging market bonds are the bonds offe...

Emerging market bonds are the bonds offered by less developed countries. The government normally issues them. These exclude borrowings from gove

Describe concepts of finance function, Q. Describe Concepts of finance func...

Q. Describe Concepts of finance function ? 1) The finance function in the business task in the providing funds needed by the enterprises on the term that one most favorable in

Evaluate the annual premium for policy, A with-profit whole life assurance ...

A with-profit whole life assurance policy was issued to a life then aged 25 with: • basic (initial) sum assured of S = $100,000; • bonuses added to sum assured at the end of ea

Disadvantage or redundancy of excessive working capital, Q. Disadvantage or...

Q. Disadvantage or redundancy of excessive working capital? Excessive working capital means idle funds which earns no profit for the business operation it should have nighters

Types of dividend policy, TYPES OF DIVIDEND POLICY 1. Regular dividen...

TYPES OF DIVIDEND POLICY 1. Regular dividend policy: Payment of dividend at standard rate is known as regular dividend policy. 2. Stable dividend policy: Payment of fix

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd