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Conservative managers will have a policy of holding a large working capital balance, while aggressive managers will hold a low working capital balance. Which of the following is a consequence of an aggressive management policy?
A. Increased bad and doubtful debts
B. Increased credit periods attract more customers
C. Increased inventory obsolescence
D. Increased risk of inventory outage.
The correct answer is D.
my question is: Why B is incorrect? why D is the correct answer?
WC = Cash + Receivables + Inventory – Payables.
If WC is to be low, then cash, receivables and inventories will have to be low.
A is wrong as low receivables imply low bad debts.
B is correct as a statement on its own, but if there is to be an aggressive WC, receivables will be low and credit periods will therefore have to be low to ensure that.
C is wrong as low inventory means the chance of obsolescence is low
D is correct because if inventory is low there is a greater chance of running out of it.