1. Financing current assets

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 downturns in business cycles. Temporary current assets fluctuate seasonally or with business cycles. 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.

All fixed assets and the nonseasonal portion of current assets, as well as seasonal needs of current assets, are financed with long-term capital.

Conservative approach

Maturity matching approach

Aggressive approach

All 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.

Maturity matching approach

Aggressive approach

Conservative approach

Some portion of fixed assets and the nonseasonal portion of current assets are financed with long-term capital, and all seasonal needs of current assets and the remaining portion of fixed assets are financed with short-term loans.

Maturity matching approach

Aggressive approach

Conservative approach