A working capital policy is called an aggressive policy if the firm decides to finance a part of the permanent working capital by short term sources. The firm may accept even greater risk of insolvency in order to save cost of long term financing and thus in order to earn greater return. …
Why do some managers adopt aggressive working capital financing policy?
An aggressive working capital policy is one in which you try to squeeze by with a minimal investment in current assets coupled with an extensive use of short-term credit. Your goal is to put as much money to work as possible to decrease the time needed to produce products, turn over inventory or deliver services.
How aggressive working capital policies affects performance and liquidity of a firm?
Aggressive financing policy has a negative and significant impact on profitability and firms value. Therefore more aggressive the financing policy, that yields negative return on assets and firms value. This study indicates that the more short-term debt used by the company, the lower of the company’s profitability.
What is aggressive financing?
An aggressive financing strategy is a financing strategy under which a company funds its seasonal requirements with short-term debts and its permanent requirement with long-term debt. The risk of an aggressive strategy is that it seldom yields the high profitability being planned to achieve.
What is an aggressive capital structure?
Measures of Capital Structure Companies that use more debt than equity to finance their assets and fund operating activities have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure.
What does aggressive working capital management policy mean?
The aggressive working capital management policy refers to the maintaining a high short-term liabilities level and a low level of current assets compared to the total assets . Working capital management policy can be measured by using aggressive financing policy and aggressive investment policy.
How does Working Capital Management affect profitability?
Vedavinayagam Ganesan (2007), found that the working capital management efficiency is negatively associated to the profitability and liquidity. When the working capital management efficiency is improved by decreasing days of working capital, there is improvement in profitability of the firms in telecommunication firms in terms of profit margin.
What are three types of working capital policy?
There are three types of working capital financing policy. firstly, aggressive policies of the working capital financing, where is the working capital is fulfilled with all of short-term debt. furthermore, moderate policies, where is the working capital fulfilled to 50% with short-term debt and 50% with long-term debt.
Which is the best approach to financing working capital?
In this approach of financing, the levels of inventory, accounts receivables and bank balances are just sufficient with no cushion for uncertainty. There is a reasonable dependence on the trade credit.
