We will compare these three approaches on 6 parameters viz. liquidity, profitability, risk, asset utilization, and working capital.
|Liquidity||It is extremely important in business for a smooth operation of the day to day business activities and to grab occasional opportunities thrown by the business.||Liquidity is high, because of heavy usage of long-term funds. It can take advantage of sudden opportunities.||Liquidity is low due to greater dependability on short-term funds even for a part of long-term assets. It does not keep idle funds and therefore saves interest cost on them.||Liquidity is balanced i.e. neither high nor low. It attempts to strike a balance between liquidity and cost of idle funds.|
|Profitability||Profitability is the final goal of any business. Each and every step of a manager should finally boil down to profitability.||Under normal circumstances, profitability is less in this strategy because of too much of idle and costly funds. Higher rate and bigger magnitude of interest cost reduce the profitability.||Since the interest cost is minimized in this approach, higher profitability is obtained.||Because of cut to cut management, a balance is achieved between interest cost and loss of profitability. Moderate profitability is maintained here. It is greater than conservative and lesser than aggressive.|
|Risk||Risk here refers to the risk of bankruptcy.||There is very low risk of bankruptcy as a higher level of liquidity is maintained in the business in this approach.||There is a high risk of bankruptcy due to extremely tight liquidity position being maintained.||Risk is balanced here. The firm will bow down to bankruptcy only in an extremely bad situation.|
|Asset utilization||Asset utilization here is the utilization of current assets.||Too high level of current assets makes its utilization ratio low.||Similarly, too low level of current assets makes the utilization ratio high.||Moderate|
|Working capital||Working capital is the capital used to fill the gap between current assets and current liabilities.||More working capital is required to execute the conservatism. Higher working capital avoids all risks.||Very low working capital is maintained. Low working capital increases risk but saves the interest cost.||Moderate working capital is maintained to stay somewhere between conservative and aggressive strategies.|