Conservative working capital funding policy
A conservative funding policy finances long-term assets and permanent working capital with long-term sources and also uses some long-term finance for fluctuating needs. It can reduce dependence on frequent short-term refinancing, but may leave surplus funds at low-demand periods or increase financing cost. Actual liquidity depends on cash flows, facility terms and the quality of forecasts. This funding decision is different from holding a high level of current assets as an investment policy.
Worked example
A seasonal business uses a five-year facility to cover its permanent working capital and part of seasonal demand. In the quiet season it may hold surplus cash; it compares that cost with the reduced reliance on short-term rollover.
Common mistake
Treating long-term finance as a guarantee of solvency or confusing funding maturity with a conservative level of inventory and receivables.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |