Which statement best describes a conservative working capital policy?

Which statement best describes a conservative working capital policy?

• A. It reduces risk by holding high levels of current assets.
• B. It reduces costs by holding the lowest levels of current assets.
• C. It minimizes the cash conversion cycle.
• D. It requires no external financing.

Answer: (D)

A conservative working capital policy focuses on ensuring liquidity by keeping larger buffers of current assets and funding them with long‑term or internally generated funds. This approach reduces the risk of liquidity problems because the day‑to‑day needs for working capital aren’t heavily reliant on short‑term financing that can be costly or hard to roll over. Therefore, in the sense of sustaining a high level of current assets without needing to continually secure new external funds for day‑to‑day operations, the statement that it requires no external financing aligns with the idea of using longer‑term or internal funding sources to support working capital. In practice, there may still be some external funding for specific needs or temporary fluctuations, but the emphasis is on minimizing reliance on external, especially short‑term, financing for ongoing working capital.

A conservative working capital policy focuses on ensuring liquidity by keeping larger buffers of current assets and funding them with long‑term or internally generated funds. This approach reduces the risk of liquidity problems because the day‑to‑day needs for working capital aren’t heavily reliant on short‑term financing that can be costly or hard to roll over. Therefore, in the sense of sustaining a high level of current assets without needing to continually secure new external funds for day‑to‑day operations, the statement that it requires no external financing aligns with the idea of using longer‑term or internal funding sources to support working capital. In practice, there may still be some external funding for specific needs or temporary fluctuations, but the emphasis is on minimizing reliance on external, especially short‑term, financing for ongoing working capital.