ZX is a relatively small US-based company in the agricultural industry. It is highly mechanised and uses modern techniques and equipment. In the past, it has operated a very conservative policy in respect of the management of its working capital. Assume that you are a newly recruited management accountant. The finance director, who is responsible for both financial control and treasury functions, has asked you to review this policy. You assemble the following information about the company’s forecast end-of-year financial outcomes. The company’s year end is in six months’ time.US$’000ReceivablesInventoryCash at bankCurrent assetsNon-current assetsCurrent liabilitiesForecast sales for the full yearForecast operating profit (18% of sales)You wish to evaluate the likely effect on the company if it introduced one or two alternative approaches to working capital management. The finance director suggests you adjust the figures in accordance with the following parameters’Aggressive’ policy– 30% Reduce to $100,000No change +20%+4%

A discussion of the main aspects to consider when determining policy in respect of the investment in, and financing of, working capital, in general and in the circumstances of ZX.

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Calculations of the return on net assets and the current ratio under each of three scenarios shown below.
(i) The company continues with its present policy.
(ii) The company adopts the ‘moderate’ policy.
(iii) The company adopts the ‘aggressive’ policy.


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