Which statement describes a moderate working capital policy?

Which statement describes a moderate working capital policy?

• A. It sits between costs and risk, balancing current assets and liquidity.
• B. It minimizes current assets to reduce costs.
• C. It maximizes current assets to reduce risk completely.
• D. It ignores liquidity concerns.

Answer: (A)

The key idea is balancing liquidity with the costs of holding current assets. A moderate working capital policy aims for a middle ground: enough current assets to meet day-to-day needs and any seasonal swings, but not so much that financing and carrying costs erode profitability. This describes sitting between costs and risk, by balancing current assets and liquidity: you keep enough cash, receivables, and inventory to avoid liquidity problems, while avoiding excessive tie-up of funds. Minimizing current assets cuts carrying and financing costs but increases liquidity risk, which is more characteristic of an aggressive policy. Maximizing current assets lowers liquidity risk but raises carrying costs, fitting a conservative policy. Ignoring liquidity concerns would neglect a core aspect of working capital management.

The key idea is balancing liquidity with the costs of holding current assets. A moderate working capital policy aims for a middle ground: enough current assets to meet day-to-day needs and any seasonal swings, but not so much that financing and carrying costs erode profitability. This describes sitting between costs and risk, by balancing current assets and liquidity: you keep enough cash, receivables, and inventory to avoid liquidity problems, while avoiding excessive tie-up of funds.

Minimizing current assets cuts carrying and financing costs but increases liquidity risk, which is more characteristic of an aggressive policy. Maximizing current assets lowers liquidity risk but raises carrying costs, fitting a conservative policy. Ignoring liquidity concerns would neglect a core aspect of working capital management.