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

In working capital management, a firm that adopts an aggressive working capital policy would typically:

An aggressive working capital policy keeps current assets low relative to sales and leans on short-term financing. This lowers carrying costs and raises expected profitability, but increases the risk of liquidity shortage. Conservative policy does the opposite, holding high current assets and using more long-term funds.

  1. AHold high levels of cash and inventory to avoid stock-outs
  2. BMaintain a low level of current assets relative to sales and rely more on short-term financingCorrect
  3. CFinance all current assets entirely from long-term funds
  4. DKeep a high current ratio to impress creditors

Explanation

An aggressive policy keeps current assets low relative to sales and uses more short-term finance, which raises expected return but also risk. Holding large cash and inventory, or financing everything with long-term funds, describes a conservative policy.

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