Conservative Approach Working Capital

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As the name itself suggests, under the approach the finance manager does not undertake risk.  As a result, all the working capital needs are primarily financed by long term sources and the use of short term sources may be restricted to unexpected and emergency situation only.  The working capital policy of a firm is called a conservative policy when all or most of the working capital needs are met by the long term sources and thus the firm avoids the risk of insolvency. 

So, under the conservative approach, the working capital is primarily financed by long term sources.  The larger the portion of long term sources used for financing the working capital, the more conservative is said to be the working capital policy of the firm.  In case, the firm has no temporary working capital need then the idle long term funds can be invested in marketable securities.  This will help the firm to earn some income.  The firm uses a small amount of short term sources to meet its peak level working capital needs.  It also stores liquidity in the form of marketable securities in slack season. 

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