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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

A company follows an aggressive working capital policy compared with a conservative one. Which of the following is the expected result?

An aggressive working capital policy holds minimal current assets for a given sales level, so less capital is blocked and expected returns are higher. The trade-off is greater risk of illiquidity and stock-outs, whereas a conservative policy gives safety at lower profitability.

  1. AHigher liquidity and lower risk of stock-out, with lower expected profitability
  2. BLower investment in current assets, higher expected return but higher risk of illiquidityCorrect
  3. CHigher investment in current assets and greater use of long-term funds to finance them
  4. DLower risk and lower return because of greater cash balances

Explanation

An aggressive policy keeps current assets low relative to sales, which reduces funds blocked and raises return on investment, but it increases the risk of stock-outs and inability to meet obligations. Options A, C and D describe a conservative policy.

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