The short-term fund, long-term fund, funding strategy
Aggressive funding strategy would require the management to utilize short-term borrowing to finance less permanent working capital and current assets. Equally, the long-term debts are to finance permanent financial needs and fixed asset requirements of the firm (Sohail, Rasul & Fatima, 2016). This strategy could be cheaper, considering borrowing in the short-term is less expensive than borrowing in the long-term. Additionally, it can offer higher profitability to the firm than a conservative strategy, which is less risky and less profitable. Assuming there are no additional costs of borrowing other than the interest cost, the following would be scenarios of aggressive and conservative funding.
- Aggressive approach
Sum total *0.06
=5,700*0.06
=342
- Conservative approach
Total *0.08
=5,700*0.08
=456
From the above calculation, there is a saving in using short-term borrowing as they are usually cheaper. However, the rates could fluctuate and pose a risk.
- Risks of conservative funding
It exposes a company to low working capital risks, which could result in insolvency if not well managed. Little working capital is experienced since the required amount is the only amount availed without extra resources to cater for estimate deviations
The strategy mounts significant pressure from shocks and short-term borrowing, which can cause losses to opportunities. Stringent allocation of vdoes not allow the management team to cushion the company when shocks occur. As such, there are some lost opportunities due to the limitation of working capital resources.
References
Sohail, S., Rasul, F., & Fatima, U. (2016). Effect of Aggressive & Conservative Working Capital Management Policy on Performance of Scheduled Commercial Banks of Pakistan. European Journal of Business and Management, 8(10), 40-48.