Assignment-4

Working Capital Policy

of
Nava Bharat Ventures Ltd.

Course: Financial Management-1

Instructor: Prof S N Rao

Nirmit Jain/10133/Sec-1,PGP-1
Summary Report
Working Capital policy is the set of guidelines that a company follows keeping in mind its day
to day cash, inventories, receivables, accruals, and accounts payable etc. A working capital
policy also deals with the financing of the current assets. This aspect of working capital policy
can be broadly divided into three approaches on the basis of mix of short and long term finances.

These approaches are:

Conservative Approach: Under this approach, a firm is said to be conservative as it depends

more on long-term funds to finance its permanent current assets and a part of temporary current
assets. When the company doesn’t need much current assets for operations, it generally parks its
funds in short-term marketable securities. This approach has been called conservative as the
company, comparatively, has less risk of facing shortage of funds. However, it also attracts lower
returns due to lesser risk.

Moderate Approach: The firm uses a matching or hedging approach by funding only its fixed
assets and permanent current assets by long-term finances, current liabilities are required to fund
the temporary current assets.

Aggressive Approach: This approach goes one step ahead of the two approaches above wherein
the short-term finances finance the current assets more than what is warranted, sometimes even
to the extent of financing fixed assets. The company however, faces higher risk of facing
financial embarrassment.

The Company Nava Bharat Ventures Ltd. seems to have followed an approach that is more
towards conservative side. But in the recent years it has been increasing its unsecured loan part
of the total debt.

The Total Current Assets of the company is 125.88% of total assets(total current assets are not
net of current liabilities) which have been financed majorly by the long-term sources.

This increase in the current assets both as a percentage of sales and total assets has been due to
increase in loans and advances and cash and short term deposits. Both have gone way above the
10yrs average in the recent years. This tells us that the company is keeping higher cash and
parking funds in the short term deposits.

However, to improve the efficiency the company has brought down inventory as a percentage of
sales and total assets from the average(10yr) of 26.94 % and 65.87% to 23.95% and 26.14%
respectively. The debtors have gone up as a percentage of sales from 10yr average of 8.5% to
12.4% but as a percentage of total assets it has reduced from the average of 21.03 to 13.53 %.

The unsecured loan as a percentage of secured loan and total debt, both have increased
considerably from average of 31.16 and 19.71 to 55.65 and 35.75%. Normally, unsecured loan
are given for short term, therefore one can assume that the company is trying to move towards
the moderate approach from extremely conservative approach earlier.