Liquidating working capital

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In this approach of financing, the levels of inventory, accounts receivables and bank balances are just sufficient with no cushion for uncertainty.

There is a reasonable dependence on the trade credit.

This accounting principle assumes that, a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future.

If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.

The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.

The aggressive approach is a high-risk strategy of working capital financing wherein short-term finances are utilized not only to finance the temporary working capital but also a reasonable part of the permanent working capital.

We can easily make out that long term funds are financing total fixed assets and a part of permanent assets.

A major part of Seasonal requirement or temporary working capital is financed by short term source of finance.

This strategy faces the high level of insolvency risk because the permanent assets are financed by the short-term financing sources.

To maintain those permanent assets, the firm would need to be repeated refinancing and renewals.

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