A working capital manager describes her firm's approach as financing all permanent current assets and only a portion of fluctuating (seasonal) current assets with long-term capital, while relying on short-term borrowing only for the remaining seasonal needs. This approach is best described as which working capital financing strategy?
- AAn aggressive strategy, because it minimizes the use of long-term financing
- BA maturity-matching strategy, because asset and liability maturities are precisely aligned
- CA moderate strategy, because permanent assets are financed with short-term debt and seasonal assets with long-term debt
- DA conservative strategy, because it relies heavily on long-term financing to cover current asset needs
Show answer & explanationAnswer & explanation
Correct answer: D. A conservative strategy, because it relies heavily on long-term financing to cover current asset needs
A conservative working capital financing strategy uses long-term (more expensive but more stable) financing to cover not only permanent current assets but also part of the temporary/fluctuating current assets, reducing refinancing and interest rate risk at the cost of higher financing expense. This is distinct from an aggressive strategy (using short-term debt even for permanent assets) and a maturity-matching strategy (asset and liability maturities aligned exactly).
Why the other options are wrong
- A. Incorrect — an aggressive strategy uses more short-term debt, even for permanent assets, not more long-term financing.
- B. Incorrect — maturity matching aligns asset and liability maturities exactly, with no long-term financing of seasonal needs.
- C. Incorrect — this describes financing choices reversed from typical definitions and is not the moderate/maturity-matching approach.
Working Capital Financing Strategies
Approaches to financing current assets that range from aggressive (max short-term debt) to conservative (max long-term financing), with maturity matching in between.
- Aggressive: short-term debt finances part of permanent assets too, higher risk/lower cost
- Conservative: long-term financing covers permanent assets plus part of seasonal assets, lower risk/higher cost
- Maturity matching: asset and liability maturities are aligned
Memory trick: Conservative = Cushioned with long-term cash.