WORKING CAPITAL FINANCE. Financing Current Assets- Policies Short term Current Assets financed by only short term financial sources(period < 1year) like.

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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 ProfitabilityFirm Liquidity Investing in additional marketable securities & inventories LOWER HIGHER Increasing the use of short term versus long term sources of financing HIGHER LOWER