Conservative Approach - Financing Current Assets
An exact similar of asset life along with the life of the funds required to finance the asset may not be possible. A firm that follows the conservative approach depends more on long-term funds for financing needs. Consequently, the firm, finances its permanent assets and a part of its temporary assets along with long-term funds.
It should be notice that short-term funds are cheaper than long-term funds. Several sources of short-term funds like accruals are cost-free. Still, short-term funds must be repaid during the year and so they are highly risky. Through this in mind, we can seem the risk-return trade off of the three approaches: