Question

what are three alternatives of current asset financing policy

Answer 1

Answer)

Many companies experience cyclical and/or seasonal fluctuations in its business model . For example, winter ware selling firms have peaks in the winter, retailers peak around festivals.All businesses should build up on current assets and its utilization. The inventory are very cruicial for successful production and operation of the firm.with the increase in sales at time of the upswing, so the level of current assets will be increased and additional current assets is required as temporary current assets. The way amd methods permanent and temporary current assets of the company are financed is known as the firm’s current asset financing policy.

• Maturity Matching, (Self-Liquidating) method : strategy to reduce the risk not to pay off its maturing obligations. To example ,a company borrows for one year to build a production unit . Net Cash flows would not be enough to pay off the loan at the end of the year, that's why the loan would have to be renewed. if lender refuse to renew the loan the company would face problem .But if the same loan would have taken for long term and the problem of renewal would not have arisen.
• Aggressive Approach :A aggressive firm finances generally all of its fixed assets with long-term capital and a part of its permanent current assets with short-term, nonspontaneous credit.

• Conservative Approach : Genarally a permanent and long term capital is being used to finance all permanent asset of the firm and some times to meet some of the seasonal needs. In such situation, the company uses a portion of amount of short-term, nonspontaneous credit to meet its peak requirements to meet a part of its seasonal needs by “storing liquidity” in the way of marketable securities.