How does a company‟s working capital policy impact on its liquidity – profitability position? Explain with reference to the strategies available to the firm for financing its working capital.

CPA-Financial-Management-Section-3 Revision kit

A company may use matching strategy where source of finance has some maturity with the life of assets being financed.

An aggressive policy uses more of short-term finance for the current assets (permanent working capital) requirement of the firm whereas as conservative policy employs more of long-term finance.

An aggressive policy is risky – it implies less liquidity for the firm since funds are arranged on short-term basis when required. It lead to greater returns, no costs will be paid when the finance is not used. Could generate settlement problems.

A conservative policy employs more of long-term sources of finance (enhancing liquidity). This may however, be associated with lower returns since the cost of funds has to be met irrespective of whether its being used.

(Visited 28 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published. Required fields are marked *