Lesson 6 of 7 · All lessons in this module
- The operating cycle and the cash conversion cycleVideo lesson
- Shortening the cycle and the cost of trade creditVideo lesson
- Total and net working capital
- Liquidity and its primary and secondary sources
- Drags, pulls and liquidity ratiosVideo lesson
- Conservative, moderate and aggressive working capitalVideo lesson
- Short-term funding strategy
Lesson 6 of 7 · 14 min
Conservative, moderate and aggressive working capital
Firms choose how much current assets to hold and how to fund them: conservative firms hold more and fund long term, aggressive firms hold less and lean on short-term debt, and moderate firms match the two.
In short
- The goal of working capital and liquidity management is to maximise firm value while keeping ready access to the funds needed for operations and creditors.
- Permanent current assets are the base level always needed; variable current assets come with seasonal peaks or growth.
- Conservative: more current assets relative to sales, more long-term funding. Most flexible, but the costliest.
- Aggressive: fewer current assets, more short-term funding (for variable and some permanent needs). Cheapest, but exposed to rollover risk.
- Moderate (matched): permanent needs funded long term, variable needs funded short term.
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