Investment And Determine The Required Level Of Working Capital Investment

Question 1

Benefits
Disadvantages
Determination of working capital

Answer 1

Here are the smart notes:

Benefits of Investing in Working Capital

• Customer satisfaction: Holding inventory allows for timely supply to customers.
• Competitive advantage: Offering credit to customers can attract business.
• Liquidity: Having cash on hand facilitates immediate payments.

Disadvantages of Excessive Investment in Working Capital

• Opportunity cost: Investing in working capital means forgoing potential returns from other investments.
• Reduced profitability: Excessive working capital investment can decrease profits.

Determining the Required Level of Working Capital Investment

• Working capital cycle: The time between paying suppliers and receiving payment from customers.
• Management attitude to risk: Risk-seeking vs. risk-averse approaches influence working capital policy.

Factors Influencing Working Capital Requirements

• Industry characteristics: Different industries have varying working capital needs.
• Terms of trade: Credit periods offered to customers and taken from suppliers impact working capital.
• Bargaining position: A company’s relative negotiating power affects its working capital requirements.

Working Capital Policy Approaches

• Aggressive policy: Minimizing working capital to reduce costs, but increasing risk.
• Conservative policy: Maintaining adequate working capital to ensure customer satisfaction and supplier relationships, but increasing costs.