Working Capital Investment and financing policy

Working Capital Investment and financing policy

Working capital investment is the amount of money you require to expand your business, meet short-term business responsibilities and cover business expenses.

Working capital investment and financing policy: There are three approaches which are used to working capital investment and financing policy. These are as follows –

(1) Conservative approach: Conservative financing plans use long-term financing that is needed under a matching approach. The firm is financing a portion of its temporary current asset requirements with long term financing. These plants are conservative because they involve relatively heavy use of long term financing. Generally, a conservative working capital policy is followed to keep the company assets and liabilities in sync with each other, with the value of the assets on the higher side, in case of sudden exigencies.

(2) Aggressive approach: The firm’s financing plan is said to be aggressive if the firm uses more short term negotiated financing that is needed under the matching approach. The firms have no longer financing all its permanent current assets with long term financing. This policy, as the name suggests, is a high-risk one. Owing to the risk factors, returns are also higher. To follow this, a business must minimize its current assets or the amount of debt its owed to. The more short term financing used relative to long term financing, the more aggressive the financing plan.

(3) Matching approach: Under a matching approach, fixed assets and permanent current assets would be financed with long term financing, and temporary current assets would be financed with short term financing. Businesses generally follow this policy when they want their working capital to be less; thereby utilizing or investing the money elsewhere.