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. Continue reading “Approaches to determine financing of working capital”

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Principle of working capital management policy

The following are the 4 principles of working capital management policy:

1) Principle of equity position: as per this principle every investment in the current assets should contribute to the net worth of the firm. The position of current assets can be well judged by the two ratios; current assets to total asset and current asset to total sales. Continue reading “Principle of working capital management policy”

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