The level of working capital
Aggressive policy:
- Increase profitability, less cash is tied up in current assets
- Cash shortage or running out of stock may lead to increased risk
- Lower level of current assets for a given level of activities
Conservative policy:
- Holding higher level of stock
- Maintain larger cash balance, even investing in short-term securities
- Lower risk of financial and stock problems at the expense of reducing profitability
Moderate policy:
- Middle path between the above two
Approaches to determine appropriate financing mix
Hedging approach
- The maturity of these funds matches the maturity of the different types of assets.
Conservative approach
- Using long-term funds to finance not only fixed assets and permanent current assets, but some fluctuating current assets as well
- The risk is lower, higher cost of long-term finance leads to reduced profitability
- Overcapitalization
Aggressive approach
- Finance part of its permanent asset needs with temporary or short-term funds
- Increased risk of cash shortfall,
- Overtrading
