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A conservative approach to working capital investment will increase profitability
This statement is incorrect. Why?A conservative approach involves financing most of the working capital (both temporary and permanent working capital) using long-term finance.
This means that they are paying interest on the whole amount whether or not it is actually needed from day-to-day, and paying more interest means less profit not more.Also, the long-term finance used for the temporary working capital would be better invested in non-current assets which are what generates the profits.
Liquidity is looking at how capable the company is of paying its liabilities in the short-term.
A big overdraft would reduce the liquidity, but long-term finance does not affect it.
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