2.2 WORKING CAPITAL POLICY Flashcards
What is a Working Capital Policy ?
Managing a firm’s (NWC) by [deciding on a strategy] for financing the firm’s current assets and liabilities,
[considering] the advantages and disadvantages of each financing source.
What is the Principle of Self-Liquidating Debt ?
It states that the (maturity of the source of financing) should match the (length of time that the financing is needed),
Such as using [short-term loans for seasonal inventory increases].
What are the types of investments in assets ?
Permanent and Temporary
Asset Investments
What are temporary investments in assets?
Temporary investments include current assets that will be liquidated and not replaced within the current year,
Such as cash, marketable securities, accounts receivable, and seasonal inventory fluctuations
What are permanent investments in assets?
Permanent investments are assets expected to be held for more than one year,
Including the minimum level of current assets and fixed assets.
What are the types of Sources of Financing?
Spontaneous, Temporary, and Permanent
Sources of Financing
What are spontaneous sources of financing?
Spontaneous sources arise naturally from day-to-day operations,
Such as trade credit and accounts payable.
What are temporary sources of financing?
Temporary sources typically consist of current liabilities incurred on a discretionary basis,
Such as unsecured bank loans and commercial paper.
What are permanent sources of financing?
Permanent sources are available for longer periods
include intermediate-term loans, long-term debt, preferred stock, and common equity.
How does the principle of self-liquidating debt guide financial managers?
It helps determine whether to use current liabilities or longer-term sources of financing to fund assets based on the asset’s expected duration.
Why is it important to match financing sources with asset types?
Matching ensures that short-term assets are financed with short-term liabilities, minimizing financial risk and optimizing cash flow.
