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

A firm adopts an aggressive working capital financing policy. Which of the following is the most likely feature of this policy?

Under an aggressive policy, the firm funds even part of its permanent current assets with short-term borrowings. Short-term finance is cheaper so expected return rises, but liquidity and refinancing risk rise too. Matching or conservative policies rely more on long-term funds for permanent needs.

  1. APermanent current assets are financed from long-term sources and short-term funds are used only for fluctuating needs
  2. BAll current assets including permanent portion are financed by long-term funds
  3. CPart of permanent current assets is financed by short-term funds, raising both risk and expected profitabilityCorrect
  4. DFixed assets are financed entirely from trade credit

Explanation

An aggressive policy uses short-term finance, which is cheaper, even for part of permanent working capital. This increases profitability but also the risk of refinancing difficulties. The first option describes the matching (conservative-leaning) approach and the second a conservative policy.

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