The paper 'Finance Management' is a wonderful example of a Finance and Accounting Assignment. Having enough working capital to finance business operations is important for the success of an organization. For this reason, finance managers have a responsibility to ensure attention is given to working capital financing because this is the money that keeps the business in operation every day. In the event that a company runs short of working capital, this might put a company into financial problems, thus affecting the smooth running of a business (Ogilvie 1999, p. 80).
For instance, a lack of enough working capital might result in a situation where a company defaults into paying off some of its obligations on time. At the same time, the adoption of inappropriate financing mode might result in a company losing interests, which might affect the profits of a company. Although there are a variety of financing methods commonly in use, such as hedging, aggressive and conservative approaches, aggressive financing is among the most commonly used working capital financing approach. Under this approach, a company tries to finance its current assets using the short-term sources credits.
In aggressive financing, the finance managers focus on putting as much money that a company has to work as possible as a way of minimizing the time taken to produce products or deliver services (Khan & Jain 2013, p. 13). Accordingly, in aggressive financing, a company keeps very little money on hand as most cash is utilized to finance current asset requirements. Companies that adopt aggressive financing are not bothered about maintaining liquidity as the main focus is to save costs by taking greater risk.
Aggressive financing is favored by companies for a variety of reasons, which include the fact that the approach is less costly and more profitable. Despite the benefits attached to the aggressive capital financing approach, this method is considered a risky approach to financing working capital. In particular, an aggressive financing approach puts a company at risk of falling into bankruptcy. The risk of bankruptcy is high under aggressive working capital financing because of the low liquidity position maintained by a company (Ogilvie 1999, p. 81). To avoid falling into bankruptcy, a company needs to hold enough liquid assets so as to be able to service short-term obligations that might arise in a company.
Unfortunately, in an aggressive financing approach, a company utilizes most of its short-term sources of finance, such as cash, and only maintains very little. The danger here is that, in the event that a sudden emergency arises, a company that adopts an aggressive approach to financing working capital might not be able to finance those obligations, such as bond interest payments, thus putting the business at risk of bankruptcy. Aggressive working capital financing is also considered a risky approach because it can result in lost sales.
For example, tight inventories can result in shortages because of the firm’ s inability to acquire them, thus resulting in lost sales (Khan & Jain 2013, p. 14). Besides, aggressive financing is a risky financing approach as it scares vendors from extending credit to a company because of the low liquidity position. When a company maintains a low liquidity position by using aggressive financing methods, this means that the company lacks enough liquid assets to meet its short-term debts, when they fall due, which is not good as far as vendors are concerned.
Moreover, aggressive financing is considered risky because it makes investors adamant and less willing to purchase the business bonds, which may force a company to give away higher interest rates on long-term debts issued (Khan & Jain 2013, p. 16).
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