WORKING CAPITAL FINANCE Financing Current Assets Policies Short

WORKING CAPITAL FINANCE

Financing Current Assets- Policies • Short term Current Assets financed by only short term financial sources(period < 1 year) like CP’s, Bill discounting, etc. . • Long term Net Current Assets or permanent current assets or working capital financed by long term sources (period> 5 years) 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 LOWER