Based on the organisational policy and risk-return trade off, working capital investment decisions are categorised into three approaches i.e. aggressive, conservative and moderate.
(a) Aggressive: Here investment in working capital is kept at minimal investment in current assets which means the entity does hold lower level of inventory, follow strict credit policy, keeps less cash balance etc. The advantage of this approach is that lower level of fund is tied in the working capital which results in lower financial costs but the flip side could be that the organisation could not grow which leads to lower utilisation of fixed assets and long term debts. In the long run firm stay behind the competitors.
(b) Conservative: In this approach of organisation use to invest high capital in current assets. Organisations use to keep inventory level higher, follows liberal credit policies, and cash balance as high as to meet any current liabilities immediately. The advantage of this approach are higher sales volume, increased demand due to liberal credit policy and increase goodwill among the suppliers due to payment in short time. The disadvantages are increase cost of capital, higher risk of bad debts, shortage of liquidity in long run to longer operating cycles.
(c)Moderate: This approach is in between the above two approaches. Under this approach a balance between the risk and return is maintained to gain more by using the funds in very efficient manner.
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