Q. Conservative Approach of Financial Management?
An exact matching plan may not be followed in practice. A firm may adopt a conservative approach in financing its current and fixed assets. The financing policy of the firm is said to be conservative when it depends more on long-term funds for financing needs. Under a conservative plan, the firm finances its permanent current assets and a part of temporary current assets; it stores liquidity by investing surplus funds into marketable securities.
The conservative plan relies heavily on long¬ term financing and, therefore, is less risky. The conservative financing policy is shown in figure aside. Note that when the firm has no temporary current assets (e.g., at (a) and (b)); the long-term funds released can be invested in marketable securities to build up the liquidity position of the firm.