WORKING CAPITAL FINANCE
Financing Current Assets- Policies
• Short term
Current Assets financed by only short term financial
sources(period < 1year) like CP’s, Bill discounting, etc..
• Long term
Net Current Assets or permanent current assets or working capital
financed by long term sources (period> 5years) like Equity Share
Capital, Preference Share Capital, Debentures, Long term loans, etc.
• Spontaneous Financing
Refers to Automatic sources of short term funds arising in the Normal
course of business like trade credit, outstanding expenses, etc.
APPROACHES FOR FINANCING CURRENT ASSETS
• Matching or Hedging
• Conservative
• Aggressive
Matching or Hedging
• Expected life of an asset is matched with the source
of finance period with which an asset is financed.
• Fixed assets & permanent current assets should be
financed by long term funds and temporary current
assets should be financed by short term funds.
Conservative
• Firm depends more on long term funds for financing
needs.
• Firm finances its regular or permanent current assets
& a part of temporary current assets with long term
sources of funds.
• Where the firm do not require funds temporary
current assets , the idle funds can be invested in
marketable securities so that the firm conserves
LIQUIDITY.
Aggressive
• Firm finances part of regular or permanent current
assets with short term sources of funds.
RISK RETURN TRADE OFF
IN MANAGING A FIRM’S NET WORKING CAPITAL
Firm Profitability Firm Liquidity
Investing in additional
marketable securities &
inventories
Increasing the use of
short term versus long
term sources of
financing
LOWER
HIGHER
HIGHER
LOWER