Under this policy the company maintains lower investments in current assets represent aggressive approach, intend to yield high return and accepting higher risk. b. In this strategy, apart from the fixed assets and permanent current assets, a part of temporary working capital is also financed by long-term financing sources. The price of this strategy is higher financing costs since long-term rates will normally exceed short term rates. In essence, the short-term financing wins the race if profitability is the concern. There would also be a constant displacement in the current liabilities and the possibility of having over-dues may diminish. Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Top 3 Factors for Financing Current Assets | Working Capital, Working Capital: Meaning, Concepts and Diagrams, How to Calculate Working Capital? A conservative current asset financing strategy would go for more long-term finance which reduces the risk of uncertainty associated with frequent refinancing. He is passionate about keeping and making things simple and easy. These results were further validated by examining the impact of aggressive working capital policies Permanent working capital. The primary benefits of leveraging working capital are liquidity and profitability, each of which can be viewed through a longer term lens. a) Making greater use of short term finance and maximizing net short term asset. For equations, we will use the following abbreviations: FA = Fixed AssetsPWC = Permanent Working CapitalTWC = Temporary Working Capitaleval(ez_write_tag([[728,90],'efinancemanagement_com-box-4','ezslot_1',118,'0','0'])); This is a meticulous strategy of financing the working capital with moderate risk and profitability. Total Current Assets = Total Current Liabilities, or Total Current Assets – Total Current Liabilities = Zero. Relative amounts of short-term debt a firm uses. google account manager 6xx (for android 6 to 6.x.x) download. That means short-term has lower interest cost and higher profitability whereas long term has higher interest cost and lower profitability. Which of the following working capital strategies is the most aggressive? Under relaxed policy, the company maintains current assets upto the level of ‘C2‘ for the same level of sales (S) as in restricted policy. Provisions for a minimum working capital position are often included in restrictive covenants. Using data on the firm's total funds requirements, Morton estimated the average annual short-term and long-term financing requirements for each strategy in the coming year, as shown in the following table. varies with seasonal needs. The risk of adverse change in interest rate, while refinancing may increase the cost of financing and this risk, leads to low profitability. As current ratio is 1 and the quick ratio below 1, there may be apprehensions about the liquidity, but if all current assets are performing and are accounted at their realizable values, these fears are misplaced. b) A low ratio of short-term debt to fixed assets. Which of the following working capital strategies is the most aggressive? d) A short average collection period. In this strategy, each of the assets would be financed by a debt instrument of almost the same maturity. With this policy, the expected profitability and risk levels fall between relaxed policy and restricted policy. The three main working capital strategies—aggressive, conservative, and moderate—differ primarily in the: a. In this approach of financing, the levels of inventory, accounts receivables and bank balances are just sufficient with no cushion for uncertainty. d. 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