Current asset management in the enterprise

Conservative approach to the formation of current assets includes not only the satisfaction of current needs in all types of current assets, ensuring the normal course of operations, but also the creation of high amount of reserves for unforeseen difficulties. This approach ensures the minimization of commercial and financial risks, but also adversely affects the efficiency of current assets - their turnover and the level of profitability.
Conservative model assumes that the range of current assets is also covered by long-term liabilities (debt capital). In this case, there are no short-term liabilities, and therefore there is no risk of loss of liquidity. Net working capital is equal to current assets. This model is an artificial one.
It is believed that from the liquidity position conservative strategy is the least risky and at the same time it is accompanied by relatively low current returns, as the enterprise is forced to bear the additional cost of maintaining surplus inventory. Conservative model, in principle, is economically infeasible and from the point of view that in this case, the enterprise refuses from accounts payable, in some sense being a free source of funding.
An aggressive approach to the formation of current assets is to minimize all forms of insurance reserves for certain types of assets. In the absence of failures during the operating activities such an approach to the formation of current assets provides the highest level of efficiency.
Aggressive model means that the long-term capital is a source of coverage of noncurrent assets and system part of current assets, i.e. their minimum necessary to carry out economic activities. In this case net working capital is exactly equal to this minimum. Varying part of current assets fully covered by current liabilities. It is considered that from the liquidity position this strategy is risky because permanent sources of funding in this case are sufficient only to cover the minimum current assets, but in peak season the company might not find free resources to finance the additional requirements in industrial stocks. In other words, there will be a relatively high current income (as the costs of maintaining the current inventory is minimal) and a high risk of potential losses from business interruption and possible non-receipt of income during the rapid increase in demand for products.
Moderate approach to the formation of current assets is aimed at ensuring the full satisfaction of current needs in all their forms and the establishment of normal insurance reserves. With this approach the average ratio between the level of risk and level of effectiveness of current assets is provided.
This model is most realistic. In this case, non-current assets, the system part of current assets and approximately half of varying part of current assets are financed by long-term sources. Net working capital is equal in volume to the sum of the system part of current assets and half of varying part.
In certain moments of time the company might have excess current assets, which negatively affects the profits, though it is considered as payment for the maintenance of liquidity risk at the proper level.