In this article we will learn about Conservative vs aggressive Strategy, What is Conservative Strategy, What is Aggressive Strategy and about financial strategy, too. So, you can read below all these topics.
How a financing strategy can achieve an organization’s financing goals, sets its basic stages, whether it is short-term or long-term It includes a strategic plan that how the organization can finance its overall work. An ideal financing strategy should work as a guideline for the conduct of day-to-day finance for the employees of an organization.
Examples of FINANCIAL STRATEGIES
Some popular examples of financing strategies to give your business a start are:
This financing strategy allows you to borrow money from banks or other lending institutions to use it in your business. The organization can repay the loan with interest based on the terms of the contract.
This financing strategy includes financing from investors, also called “venture capitalist“. These investors agree to assist you in your business plans in the ownership of your enterprise with the financing of your venture.
This is a less formal financial strategy that allows you to meet your money needs by asking your friends and family. This is very effective if you are a small business start-up.
Next Paragraphs are about What is the Conservative approach, What is Aggressive approach and What is Conservative vs aggressive Strategy. And We had read about what is Financial Strategy, too.
The conservative approach is the risk-free strategy of working capital financing. A company adopting this strategy holds the current high-level assets and hence high working capital too.
A large part of working capital is financed by long-term sources of money such as equity, debenture, term loan, etc. Therefore, the risk associated with short-term financing is largely abolishing.
In the conservative approach, a portion of real estate, permanent working capital and temporary working capital finances by long-term financing sources and the rest finances by only short-term financing sources.
Thus, the primary purpose of working capital management ensures. It explains in the equation given below:
Long Term Funds = Fixed Assets + Permanent Working Capital + part of Temporary Working Capital
Short Term Funds Finance = The Remaining Share of Temporary Working Capital
ADVANTAGES OF CONSERVATIVE STRATEGY
In this strategy, the level of working capital and current assets (inventory, account receivables and most important liquid cash or bank balance) is high.
A high level of inventory absorbs a sudden surge in product sales, production plans, any unusual delays in purchase time, etc., it receives a high level of customer satisfaction and smooth operation of the company.
Below, We’re going to talk about Conservative vs aggressive Strategy. So, First, read What is Aggressive approach?
An aggressive approach is a high-risk strategy for working capital financing, in which short-term finance is not only used for the provision of temporary working capital but also a fair share of permanent working capital.
In this approach to financing, the level of inventory accounts receivable, and the bank balance is adequate with only a pillow for uncertainty. There is reasonable reliance on trade credits.
A part of the permanent asset and permanent working capital is funded by long-term financing sources and the remaining part of the working capital and the remaining temporary working capital has financed only by short-term financing sources.
It is explain in the equation given below:
1. Long term funds will a part of Finance = Fixed Assets + Permanent Working Capital
2. Short Term Funds Finance = Will continue to be part of working capital + temporary working capital
ADVANTAGES OF AGGRESSIVE STRATEGY
In this strategy, due to the maximum use of short term finance, the cost of interest is low. There are two reasons for this:
First of all, the rate of interest is cheap and secondly, in the off-season, the loan can be repaid and therefore, there are no passive funds. If the operating cycle is running smoothly, then it is called the most effective working capital management.
So, Now we’re going to talk about Conservative vs aggressive strategies. Read Below.
Conservative vs aggressive strategies
Some main matter we should know about Conservative vs aggressive Strategy –
According to this funding strategy, the organization relies on long-term funds to get a share of permanent assets and temporary assets.
Since this financial strategy uses long-term funds, therefore, there is less risk of immediate deficit reduction.
For working capital financing, for this financial strategy, an organization needs to maintain its high level of current assets in relation to its sales.
Such surplus current assets can include any changes in the sale and can thus avoid disruption in production plans.
According to this financing strategy, the organization uses its short-term fund to finance a portion of its permanent asset.
This is a very risky approach because it is likely that the organization can have a difficult time dealing with its short-term obligations.
However, many organizations use this financing strategy for their profit of low financing costs and high profitability.
For working capital financing, under this approach, reliance on short term funds is used which is used to maintain current assets.
These existing assets are maintained only to meet existing liabilities and do not provide any pillows for varying working capital.
Financing strategies are essential for all financial organizations to help in planning their financial future. A financing strategy can help you set a clear-cut goal and work towards becoming a financially secure business organization. It takes into account your current financial status, your financial goals and the best possible steps to achieve them. So, Now you already know what is Conservative vs aggressive Strategy.
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