10. Financing current assets A Aa what are the current asset financing strategie

Question

10. Financing current assets A Aa what are the current asset financing strategies that firms adopt? Firms manage a variety of current assets. Permanent current assets are needed for the firm to maintain its business, and they will be carried even through downtums in business cycles. Temporary current assets fluctuate seasonally or with business cydes. Each firm must devise a financing strategy that best fits its business situation and best manages its risk Use the following table to identify the different current asset financing policies. Description Some portion of fixed assets and the nonseasonal portion of current assets are financed with long-term capital, and al seasonal needs of current assets and the remaining portion of fixed assets are financed with short-term loans Financing Policy Al fixed assets and the nonseasonal portion of current assets are financed with long-term capital, and seasonal needs of current assets are financed with short-term loans. Long-term capital finances all permanent current assets and some temporary financing needs D

Explanation / Answer

There are 3 types of Current Asset Financing Policies: Conservative, Aggressive and Matching Policies

1) Aggressive Policy

As per this policy, short-term funds are used to finance a part of its permanent assets. This is a very risky approach as there are chances that the organization might have a hard time dealing with its short-term obligations. This is the approach mentioned in statement 1

2) Matching Policy

The organization, in thsi policy, matches the expected life of the current asset with the estimated life of the source of fund to raise these financial assets. This is mentioned in the statement about how non-seasonal current assets and fixed assets are financed with long term loans and seasonal current assets are financed with short term loans. This approach is in statement 2.

3) Conservative Policy

In accordance iwth this policy, the organization relies on the long-term funds to acquire permanent assets and a part of current assets. As this financing strategy uses long-term funds, it has less risk of a shortage of immediate funds. This is approach in statement 3.

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