Maturity Matching Approach
Maturity matching approach
Guillermo Furniture Store can implement maturity matching policy as their working capital policy. If the firm implements maturity matching, the firm hedges its risk by matching the maturities of its assets and liabilities this policy allows for long-term asset financing through issuing long-term debt and equity securities. Permanent component of current assets rely on the short-term financing of its temporary assets. The inventories and receivables remain at a designated minimum level. Maturity matching can lead to an increase in costs/credit shutoff.
The idea of the maturity matching principle is to maximize profits through the correct source of financing. The fact is that short term financing is generally less expensive than long term financing however at the same time the short assets are usually less profitable than long term assets so financing short-term assets with long term debt will lead to a great. Interest expenses will arise from the length of the long term financing, and will take a large part of the profitability of the short term asset. Making the correct investment decisions for Guillermo Furniture Store is crucial to productivity. Without investing the time to develop a concise Maturity-Matching Approach program the company will make unwise and unprofitable business.
With maturity matching, Guillermo Furniture Store hedges the risk of interest rates and defaulting, by matching the maturities of its assets and liabilities. The company still must negotiate with the suppliers to repay the loan burden and alleviate the cash deficit. An option to control “outflow” is to finance seasonal variations in current assets with current liabilities of the same maturity. Another option for Guillermo Furniture store may be to finance long-term assets by issuing long-term debt and equity securities by staggering investments to help eliminate interest rate risk. In addition, in most cases there is a permanent component of current
Guillermo Furniture Store can implement maturity matching policy as their working capital policy. If the firm implements maturity matching, the firm hedges its risk by matching the maturities of its assets and liabilities this policy allows for long-term asset financing through issuing long-term debt and equity securities. Permanent component of current assets rely on the short-term financing of its temporary assets. The inventories and receivables remain at a designated minimum level. Maturity matching can lead to an increase in costs/credit shutoff.
The idea of the maturity matching principle is to maximize profits through the correct source of financing. The fact is that short term financing is generally less expensive than long term financing however at the same time the short assets are usually less profitable than long term assets so financing short-term assets with long term debt will lead to a great. Interest expenses will arise from the length of the long term financing, and will take a large part of the profitability of the short term asset. Making the correct investment decisions for Guillermo Furniture Store is crucial to productivity. Without investing the time to develop a concise Maturity-Matching Approach program the company will make unwise and unprofitable business.
With maturity matching, Guillermo Furniture Store hedges the risk of interest rates and defaulting, by matching the maturities of its assets and liabilities. The company still must negotiate with the suppliers to repay the loan burden and alleviate the cash deficit. An option to control “outflow” is to finance seasonal variations in current assets with current liabilities of the same maturity. Another option for Guillermo Furniture store may be to finance long-term assets by issuing long-term debt and equity securities by staggering investments to help eliminate interest rate risk. In addition, in most cases there is a permanent component of current
References: Sashi, C M. Journal of Financial Services Marketing, suppl. Special Issue: Financial Services for the Poor15. 4 (Mar 2011): 296-308.