Approaches to determine financing of working capital

There are mainly 3 approaches to determine financing of working capital. Let us discuss them one by one:

1) Hedging approach or matching approach: this approach means matching the maturities of debt with the maturity of financial needs. It means the sources of funds should match with the nature of assets to be financed. There are two types of working capital permanent and temporary working capital. The hedging approach suggests that the permanent working capital requirement should be financed through long term funds, while temporary working capital should be financed through the short term funds. There is low cost, high risk and high profit in this approach.

 2) Conservative approach: as the name suggests it is a conservative approach which suggests that the entire requirement of current assets should be financed through long term sources and short term sources should be used only in case of emergency. There is high cost, low risk and low profit in this approach.

 3) Aggressive approach: as the name suggests it is an aggressive approach which suggests that the entire requirement of current assets should be financed through short term sources. There is low cost, high risk and high profit in this approach.

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