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Strategies developed to ensure the funds making way into the company outweigh funds going out (positive cash flow) are known as working capital management strategies (Van Horne, and Wachowicz, 2009). In implementing strategies that maintain positive cash flow, the determination of the business’s objectives is essential.
An effective working capital management strategy serves to ensure that the current assets in the business are able to match the current liabilities for purposes of managing operational costs and meeting short-term needs. In this case, the components of working capital management strategy are current assets and current liabilities (Van Horne, and Wachowicz, 2009).
According to Van Horne, and Wachowicz, (2009), current assets in any business setting are the assets that have the capability of conversion to cash instantly. Current assets come in the form of short-term investments, inventories, and cash at hand. Current assets are essential in that they are the determinants of any company’s liquidity position. According to William, Cleverley, Cameron, (2007), for any business to succeed in the long term, it has to be able to come up with cash to serve its short-term needs.
On the other hand, current liabilities are the opposite of current assets. This is because they represent the business’s debts or funds owed by the business. Current assets are used in the settlement of current liabilities that are repayable in a span of twelve months. Examples of current liabilities to the business are short-term borrowings, taxes, inventory purchases, unpaid wages, and payable accounts. (Van Horne, and Wachowicz, 2009)
Aggressive and conservative asset mix strategy
An aggressive asset mix is a strategy, utilized where the company seeks to increase its profits in the short term. In the situation where the company utilizes the Aggressive mix strategy, it puts its priority on the investments that are highly volatile, therefore lowering the inventory levels and use of cash in its day-to-day activities. This strategy’s goal is to ensure increased profits for the business as the current assets will be associated with fewer amounts of cash. (Gitman, 2008)
The Aggressive Asset mix strategy contrasts with the conservative Asset mix strategy based on the volatility of its investments. The conservative asset mix strategy prioritizes on less volatile investments. In this case, this strategy is mainly concerned with the maintenance of a huge cash balance. Companies that employ this type of strategy are likely to hold high inventory levels and offer credit terms to their customers.
In terms of the risks, the aggressive approach characterizes more risk in that there is an increased possibility of running out of inventories and cash shortages (Gitman, 2008). On the other hand, the conservative approach is less risky, in that both the financial and inventory difficulties are reduced because of the large cash balance. However, the profit levels of the business will below. The goal of this strategy is the preservation of the business’s funds.
In conclusion, the aggressive asset mix strategy is more accommodating to businesses that have growth potential as it is based on profit maximization. On the other hand, the conservative mix strategy seeks to find a balance between growth and preservation.
Gitman, L. (2008). Principles of Managerial Finance: The importance of asset allocation. Boston: Pearson Education.
Van Horne, H., and Wachowicz, J. (2009). Fundamentals of Financial Management. Harlow: FT Prentice Hall.
William, O., Cleverley, A., Cameron. (2007). Essentials of health care finance. Eastaugh: Jones & Bartlett Learning.