Question

Describe the risks that are associated with a restrictive current asset management strategy.

Answer 1

The risk of a current restrictive asset management strategy arises from exposure to shortage costs, which can be financial or operating costs. Financial costs are associated with a sudden and unexpected loss of liquidity which makes it difficult for a business to repay its current liabilities. Under these conditions, businesses may be forced to resort to expensive emergency borrowing, or if such funds cannot be guaranteed, businesses may have to default on their loan obligations. Operational shortage costs result from a loss of production or sales that occurs if a business does not have enough finished or unfinished products.