Conservative Approach

This approach suggests that the estimated requirement of total funds should be met from long term sources, the use of short term funds should be restricted to only emergency situations or there is an unexpected outflow of funds. In the case of the Hypothetical Ltd. The requirements including the entire Rs 9,000 needed in October, will be financed by sources. The short term funds will be used only to meet contingencies. The amounts column 4 of represent the extent to which short term financial needs are being by long term funds, that is, the NWC. The NWC reaches the highest level (Rs 2,100) in ( (Rs 9,000 – Rs 6.900). Any long term financing in excess of Rs 6,900 in permanent finance needs of the company represents NWC.

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