(a) A conservative policy and an aggressive policy
(i) A conservative policy
In a conservative working capital management policy, an organization uses more of long-term sources of finance. Long-term sources are used to finance all permanent working capital (current assets) and part of temporary current assets. The firm is therefore more liquid but sacrifices profitability as interest charges have to be paid on long term finance even when it is not required.
(ii) An aggressive policy
An aggressive policy uses more of short-term finance. All seasonal working capital requirements and part of permanent current assets are financed from short-term sources. This policy lead to higher levels of profitability at the expense of liquidity.
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