Question

When does it make the most sense for a company to use an aggressive working capital strategy?

Answer 1

Aggressive working capital strategy is when a company wishes to use its current assets to the minimum and the amount of current assets available are just enough to pay the current liabilities. The core of the working capital needs are met by the long term sources of finance and the variations due to the changing seasons of the business is met by the short-term borrowings.

The goal behind this strategy is to decrease the time needed to produce products, turn over inventory or to deliver services.

The risk of bankruptcy rises as the company adopts a aggressive working capital strategy, it only makes sense to adopt this strategy when the business is not seasonal or cyclical in nature so that the business has sufficient inventory and reserves in hand.

When there is no risk involved and the business is in a secure and safe position financially, then it can adopt a aggressive working capital strategy as this strategy makes a firm vulnerable due to the frequent refinancing.