Working capital financing policies

But there is no contradiction :-) The more conservative the policy is then the greater will be the current ratio and therefore there is less risk (which is the advantage of a conservative policy). The more aggressive the policy, then the lower will be the current ratio and therefore there is more risk. The 'downside' of a more conservative policy is that there will be more interest payable (because you are borrowing money that is not always needed) whereas a more aggressive policy will mean paying less interest because you are only borrowing money when it is needed. Have you watched my free lectures on this? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.

Thank you for the reply. I think a current ratio of 6 is too high, isn't it? If the current ratio of the company is 1.2, than 83% of the current assets are financed by short-term sources. It seems to be an aggressive financing poilicy. But it is the benchmark the current ratio to be not less than 1 (if inventories are not slow-moving).

6 is certainly rather high, but there is no standard current ratio (apart from it being more than 1, otherwise there are major liquidity problems) - it very much depends on the type of business and you could only really state that it seems too high (or low) by comparing with similar businesses.