Risk exposure due to heavy short-term borrowing can be compensated for by

Question

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Carrying highly liquid assets can provide a cushion against the risk of heavy short-term borrowing. These assets can be quickly converted into cash if funding is needed to meet obligations or repay the borrowing. Illiquid assets would not be a suitable choice as they cannot be easily sold or converted into cash, and hence would not help in compensating for the risk exposure. Longer-term more profitable current assets may not provide the necessary liquidity and could lead to a mismatch between the timing of cash inflows and outflows, potentially exacerbating the risk exposure. Similarly, carrying more receivables to increase cash flow may not always be feasible or advisable, as this could increase the risk of default by customers and impact the overall credit risk profile of the business. Therefore, the best choice for compensating for the risk exposure due to heavy short-term borrowing would be to carry highly liquid assets.

Risk Exposure Due to Heavy Short-Term Borrowing Can Be Compensated