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Working Capital Management and Policies
By attempting this GDB, students will be able to understand the different policies used by the firms to manage their working capital needs.
Graded Discussion Question:
Working Capital Management refers to a firm’s ability of managing its financial activities. It deals with short term assets and short term liabilities. Each firm has different approach towards management of its working capital. Some firms prefer lower investment in current assets and have higher reliance upon short-term as well as long-term debts while some other firms use an approach opposite to it. Following are the cases explaining different working capital management approaches used by a firm:
Current approach: Crops Grain Dealer (CGD) is a firm that deals in different kinds of grain crops. The firm is currently maintaining higher investment in marketable securities in order to manage its need for buying grains (inventory) and other short-term needs. Along with it, firm also uses some portion of its long-term debt to satisfy its need of managing current assets whenever required.
New approach: However, CGD is now changing its approach towards working capital management. Firm has decided to maintain low level of investment in marketable securities. Alternatively, the firm has increased its focus on using more short-term debts to manage its inventory and other current assets requirements. Moreover, firm has also planned to use short-term loans to buy some of its long-term assets including a warehouse and a harvest machine.
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