Aggressive vs Conservative Working Capital
For start-up companies, the idea of explicitly applying either aggressive or conservative policies may not auger well in the long run since such organizations require a blend of both polices for purposes of finding the right footing. The general principle has been that the optimal amount of working capital lies somewhere in between an aggressive and conservative approach (Bank, 2019). However, established companies can find it possible to choose between the two working capital policies without suffering the consequences that a startup would incur. As a CFO to an established company, I would go for conservative working capital policy over the aggressive policy. Before the outbreak of covid-19, my decision would have been different. Conservative working capital policy provides a mechanism that handles stock volatilities without hurting company current assets.
In conservative working capital policy, the current assets are let to grow whatever the circumstances while the more significant proportion of the investment funds are set for short term assets and is often at the bank and less proportion for long term assets like purchasing parts of equipment used in production. The conservative working capital policy is mostly a cautious approach that minimizes investment-related risks associated with cash shortages for short-term. However, the policy is unpopular for the fact that it limits profitability in the long run. This is because a more substantial portion of the investment cash is not actively invested to earn returns (lying idle in the bank). In conclusion, the best model would involve drawing motivation from the risk opportunity costs and returns on the assets, which is generally a mixture of both the policies.
References
Bank, E. (2019): Aggressive vs Conservative Working Capital. Retrieved 8 June 2020, from https://smallbusiness.chron.com/aggressive-vs-conservative-working-capital-65216.html