Which statement describes an aggressive working capital policy?

Which statement describes an aggressive working capital policy?

• A. It reduces costs by holding the lowest levels of current assets possible and is high risk.
• B. It reduces costs by holding the highest levels of current assets.
• C. It minimizes the cash conversion cycle by increasing current assets.
• D. It avoids any risk by maintaining moderate current asset levels.

Answer: (A)

An aggressive working capital policy focuses on keeping current assets as low as possible and financing them with short-term funds. This approach cuts holding costs and frees up capital, but it increases liquidity risk because there’s less cushion to cover unexpected shortfalls. That idea is best captured by the statement that costs are reduced by holding the lowest levels of current assets and that this approach is high risk. The other descriptions don’t fit: holding the highest level of current assets would be conservative, not aggressive and would raise costs; increasing current assets would not minimize the cash conversion cycle and would actually tend to lengthen it; and maintaining moderate current assets to avoid risk describes a balanced policy, not an aggressive one.

An aggressive working capital policy focuses on keeping current assets as low as possible and financing them with short-term funds. This approach cuts holding costs and frees up capital, but it increases liquidity risk because there’s less cushion to cover unexpected shortfalls.

That idea is best captured by the statement that costs are reduced by holding the lowest levels of current assets and that this approach is high risk. The other descriptions don’t fit: holding the highest level of current assets would be conservative, not aggressive and would raise costs; increasing current assets would not minimize the cash conversion cycle and would actually tend to lengthen it; and maintaining moderate current assets to avoid risk describes a balanced policy, not an aggressive one.