There are three strategies or approaches or methods of working capital financing – Maturity Matching (Hedging), Conservative and Aggressive.

What are aggressive and conservative current asset financing policies?

(3) Aggressive Policy: ADVERTISEMENTS: Under this policy, a firm finances a part of its permanent current assets with short-term financing. It may rely more on short-term sources than on long-term sources for financing current assets, i.e., it is opposite to the conservative policy.

What is conservative approach and aggressive approach?

Aggressive and conservative levels of working capital sit at opposite ends of the spectrum. An aggressive policy means spending as much as possible to churn out products, move inventory and deliver services. With a conservative approach, money is being saved, and your business is buffered, somewhat, against risk.

What is conservative approach to working capital?

Conservative approach is a risk-free strategy of working capital financing. A company adopting this strategy maintains a higher level of current assets and therefore higher working capital also. So, the risk associated with short-term financing is abolished to a great extent.

What are current assets policies?

The current asset financing strategy focuses on determining the best method of financing both temporary and permanent current assets. Given the temporary and permanent nature of current assets, they can be financed with either short- or long-term sources of funding, however, there is a risk/return trade-off.

What are three alternative current asset financing policies is one best?

The three asset financing policies are the Maturity matching approach, the aggressive approach and the conservative approach.

What is conservative approach?

Conservative approach is a risk-free strategy of working capital financing. The major part of the working capital is financed by the long-term sources of funds such as equity, debentures, term loans etc. So, the risk associated with short-term financing is abolished to a great extent.

What is the difference between a conservative approach and a hedging approach?

The hedging approach implies low cost, high profit and high risk while the conservative approach leads to high cost, low profits and low risk. Both the approaches are the two extremes and neither of them serves the purpose of efficient working capital management.

What does a conservative approach mean?

adj. 1 favouring the preservation of established customs, values, etc., and opposing innovation. 2 of, characteristic of, or relating to conservatism. 3 tending to be moderate or cautious.

What is conservative working capital financing policy?

Conservative policy Generally, a conservative working capital policy is followed to keep the company assets and liabilities in sync with each other, with the assets value on the higher side, in case of sudden exigencies.

What is conservative policy of financing current assets?

Conservative Policy Moreover, current assets are always above par against the current liabilities to ascertain sufficient availability of funds. Organisations majorly utilise long-term funding options to finance fixed and fluctuating current assets. The use of short-term sources is kept to a minimum for low-risk.

What is conservative current asset policy?

Conservative Policy: The firm not only matches the current assets with current liabilities but also keeps some excess amount to meet any uncertainty. This is the lowest risk working capital policy and fails to ensure optimum utilization of funds. Hence it cuts down the expected returns of the shareholders.

What is the trade off between hedging and conservative approach?

It has been shown that the hedging approach is associated with high profits as well as high risk, while the conservative approach provides low profits and low risk. A trade off between these two extremes would give an acceptable financing strategy. …