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Higher levels of accounts receivables are due to relaxed credit terms which in turn
attracts more customer and thereby higher sales and higher sales mean higher profits in
normal circumstances.
NO INSOLVENCY RISK
Most important part and highly relevant to financing strategy are the higher levels of
cash and working capital. Higher working capital avoids the risk of refinancing which
exists in case it is financed by short-term sources of finance. Not only the risk of
refinancing but also the risk of adverse change in the interest rate while getting the short
term loans renewed are avoided. This is how the insolvency risk is avoided as at any
time company has sufficient capital to pay off any liability.