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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Which funding strategy is most likely to expose a growing business to the risk of overtrading?

An aggressive funding strategy, where part of permanent current assets is financed by short-term borrowing, most exposes a growing firm to overtrading. Short-term funds can be withdrawn or hit limits as sales grow, whereas matching and conservative policies use long-term finance for permanent needs.

  1. AAggressive strategy, financing part of permanent current assets with short-term borrowingCorrect
  2. BConservative strategy, financing all permanent and some fluctuating current assets with long-term funds
  3. CMatching strategy, financing permanent current assets with long-term funds
  4. DHolding surplus cash in short-term deposits

Explanation

An aggressive policy funds some permanent current assets from short-term sources such as overdrafts, which may be withdrawn or reach limits as sales grow, giving liquidity risk typical of overtrading. Conservative and matching policies use long-term funds for permanent needs.

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