Short Term financing/ Financing Current Assets
As a human being, we do have needs- food, shelter, clothing, and wants- laptop, cellphone, electronic gadgets, and the like. Parents work very hard in order to earn more money to give their children what they want. This is how they finance their everyday necessities and wants. This is just like in companies wherein they will do every means they can think of just to finance their everyday operations. The need for determining the proper source in financing their assets moves into the picture of working capital management. In choosing the mix of term capital and short term debt in supporting its current assets, different factors like the availability of fund, the length of time it may be required for, the purpose of requiring the fund, the size of the firm and, the cost and risk inherent in the kind of financing sources are required to be considered. Cost and risk are inversely related, that is if a company goes for a low risk source of finance, it is related to a high cost of finance and vice versa. Hence, a prudent decision making is required. It is important to make distinctions between permanent current assets and temporary current assets in selecting the approach- aggressive, conservative or moderate of financing them that would best suit the business. Permanent current assets which is outlined by Brigham as current assets that a firm must carry even at the trough of its cycle. Oppositely, temporary current assets are current assets that fluctuate with seasonal or cyclical variation in sales. Firms which are aggressive finances all of its fixed assets with long term capital and part of its permanent current assets with short term, non spontaneous credit( Brigham and Houston). These companies are willing to take risks since short term debts require higher return than long term debts. They maintain low levels of cash, inventories ,thus increasing profitability. But this would also...
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