The conservative approach deals directly with using only “long-term financing…to finance all of the firm’s long-term assets, all of its permanent current assets, and some of its temporary current assets.” (Emery, Finnerty & Stowe, 2007) The conservative approach is more likely to yield larger positive cash balance due to financing on a long-term basis. A possible downside to having a too large of a cash balance is forfeiting possible investing opportunities to grow existing funds.
The aggressive approach to financing working capital is a bit more risky than the maturity or conservative approaches. This approach deals less with long-term financing and more with short-term funds with a goal of increasing profitability with risk-taking. The approach uses “the Principle of Risk-Return Trade-Off that without some sort of market imperfection, higher expected profitability comes only at the expense of greater risk” (Emery, Finnerty & Stowe, 2007) or more simply said, the greater the risk, the larger the return.
Evaluation of the Risk Associated with the Recommendation
After a careful review of each type of new financing working capital, Lawrence Sports has