Question

Please answer the questions below:

1. Identify three Working Capital Financing Policies and explain the difference among them

2. How does bad debt affect collection of cash?

Answer 1

1). Three Working Capital Financing policies are:

1. Aggressive Policy: In the aggressive policy, liquidity is low as greater dependibility is on the short-term funds to buy it's assets. Here, there is no freserve for contingencies and the interest cost is low. As short-term funds are more required for it's day to day operations, thus it is risky in nature and if the company gets default in payment, it needs to sell it's part of the assets to repay the debt.     
2. Conservative Policy: According to this policy, liquidity is high as dependibility is on the lon-term funds. Here, profitability is low as interset cost is high and there is an idle fund with the company. Thus, there is a less chances of bankruptcy.
3. Matching Policy: According to the matching policy, liquidity is neither high nor low. It is balanced in nature. It maintains the balance between the liquidity and cost of idle funds.

2) Bad debts are the receivables that are not likely to be recovered. When customers don't pay their bills on time because for any reasons receivables of the company turns into a bad debt. Cash flow of the company effects it's balance sheet with the increase or decrease in the item of cash. An adequate cash flow is required for the smooth operation of the company's activities like payment of wages to manpower. Thus if bad debts occur, it hinders it's day to day activities. Company must manage it's bad debt by timely collection policies and maintaining the bad debt reserve.