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

A firm finances all its fluctuating (temporary) current assets with short-term borrowings and also meets a part of its permanent current assets from short-term borrowings, with the rest from long-term funds. Which working capital financing policy is this?

This is the aggressive policy. Short-term borrowings fund the temporary current assets and also part of the permanent current assets. That lowers financing cost but raises liquidity and refinancing risk. A conservative policy would instead use long-term funds for part of temporary needs.

  1. AConservative policy
  2. BAggressive policyCorrect
  3. CMatching (hedging) policy
  4. DZero working capital policy

Explanation

Under an aggressive policy, short-term funds finance all temporary current assets and also a portion of permanent current assets. This raises profitability but increases the risk of refinancing and liquidity strain. A conservative policy does the opposite by using long-term funds even for part of the temporary needs, and a matching policy funds permanent needs only with long-term funds.

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