“Impact of Aggressive Working
Management Policy on Firms’
Deepa Rose Jacob
The present study…
• investigates the traditional relationship between
working capital management policies and a firm’s
• Managers can create value if they adopt a
conservative approach towards working capital
investment and working capital financing policies.
The study also finds that investors give weight to
the stocks of those firms that adopt an aggressive
approach to managing their short-term liabilities.
What It Says…
• Management of short-term assets and liabilities
need a careful investigation because the working
capital management plays an important role in a
firm’s profitability and risk as well as its value.
Efficient management of working capital is a
fundamental part of the overall corporate strategy
in creating the shareholders’ value.
Definition of 'Working Capital'
Working Capital refers to that part of the firm’s capital, which
is required for financing short-term or current assets such a
cash marketable securities, debtors and inventories.
thus, invested in current assets keep revolving fast and are
constantly converted into cash and this cash flow out again in
exchange for other current assets. Working Capital is also
known as revolving or circulating capital or short-term capital.
KINDS OF WORKING CAPITAL
Significance of Net Working Capital
Maintaining Liquidity position
For maintaining liquidity position there is a need to maintain
CA sufficiently in excess of CL.
Judge Financial Soundness of a firm
The Net working capital helps creditors and investors to judge
financial soundness of a firm.
Working Capital Financing Mix
Approaches to Financing
Aggressive and conservative levels of working capital
sit at the opposite ends of a spectrum.
This approach suggested that the entire estimated
investments in current asset should be finance from
long term source and short term should be use only
for emergency requirement.
Distinct features of this approach
•Liquidity is greater
•Risk is minimized
Companies in volatile or seasonal industries such as
tourism, farming or construction might adopt
conservative working capital policies to buffer against
1. If you employ a conservative working capital policy:
there’s plenty of cash in the bank,
2. your warehouses are full of inventory and
3. your payables are all up to date.
If you compute the working capital ratio –
current assets/current liabilities
policy might yield a ratio above 2.0.
That is, you have more than $2 in current assets for
every dollar of short-term liabilities. Conservatively
managed working capital will help lower your risks of
short-term cash shortages but might hurt your long-
term profitability, because excess cash doesn’t earn
much of a return.
• The aggressive approach suggests that the entire
estimated requirement of current asset should be
financed from short-term sources and even a part of
fixed asset investment be financed from short - term
This approach make the finance mix :
• More Risky
• Less costly
• More Profitable
• An aggressive working capital policy is one in which
you try to squeeze by with a minimal investment in
current assets coupled with an extensive use of shortterm credit.
• Your goal is to put as much money to work as possible
to decrease the time needed to produce products, turn
over inventory or deliver services.
• Speeding up your business cycle grows your sales
and revenues. You keep little money on hand, cut
slow-moving inventory and unnecessary supplies to
the maximum and pay out your bills for as long as
In Simple Words…
Conservative- Use permanent capital for permanent
assets and temporary assets.
Average - Match the maturity of the assets with the
maturity of the financing.
Aggressive - Use
short-term financing to finance permanent assets.
present study done by Mian Sajid Nazir and Talat
Afza, lecturer and professor of CIIT, Lahore, Pakistan, investigates
the relative relationship between the aggressive/conservative
working capital policies and profitability as well as risk of firms for
208 public limited companies listed at Karachi Stock Exchange for
the period of 1998-2005. The empirical results, which is in line with
the study of Afza and Nazir (2007), found the negative relationship
between working capital policies and profitability. It also says that
there is no relationship between the level of current assets and
liabilities and risk of the firms.