Which statement describes a conservative working capital policy?

Which statement describes a conservative working capital policy?

• A. It reduces risks by holding high levels of current assets and incurs higher costs.
• B. It reduces costs by holding low levels of current assets.
• C. It moves toward a moderate cash conversion cycle.
• D. It eliminates the need for financing.

Answer: (A)

A conservative working capital policy keeps high levels of current assets to reduce liquidity risk. By holding more cash, receivables, and inventory, the firm lowers the chance of cash shortfalls, stockouts, or financing difficulties, which is especially helpful in uncertain markets. This safety comes with higher carrying costs and greater financing needs, since funds are tied up in current assets rather than earning returns elsewhere. The alternative of holding fewer current assets lowers costs but increases liquidity risk, so it describes a more aggressive stance. A moderate cash conversion cycle reflects a middle-ground shift, not specifically about keeping large current asset buffers. And financing isn’t eliminated under a conservative approach; in fact, higher current assets typically require more funding.

A conservative working capital policy keeps high levels of current assets to reduce liquidity risk. By holding more cash, receivables, and inventory, the firm lowers the chance of cash shortfalls, stockouts, or financing difficulties, which is especially helpful in uncertain markets. This safety comes with higher carrying costs and greater financing needs, since funds are tied up in current assets rather than earning returns elsewhere. The alternative of holding fewer current assets lowers costs but increases liquidity risk, so it describes a more aggressive stance. A moderate cash conversion cycle reflects a middle-ground shift, not specifically about keeping large current asset buffers. And financing isn’t eliminated under a conservative approach; in fact, higher current assets typically require more funding.