Actually there is no definitive answer. Several considerations must be included in a proper analysis: a) Cash reserves. The flexible financing strategy implies surplus cash and little short-term borrowing. This strategy reduces the probability that a firm will experience financial distress. Firms may not need to worry as much about meeting recurring, short-run obligations. However, […]

The target cash balance involves a trade-off between the opportunity costs of holding too much cash and the trading costs of holding too little. If a firm tries to keep its cash holdings too low, it will find itself selling marketable securities (and perhaps later buying marketable securities to replace those sold) more frequently than […]

Restrictive short-term financial policies are a)Keeping low cash balances and no investment in marketable securities. b)Making small investments in inventory. c)Allowing no credit sales and no accounts receivable.