ALTERNATIVE STRATEGIES IN FINANCING WORKING CAPITAL

BROAD CATEGORIES OF ASSETS

Long Term/ Fluctuating or Permanent Assets Seasonal Assets

LONG TERM/ PERMANENT ASSETS

-Portion of assets remain unchanged over the year.
Property, Plant and Equipment

Long term investments

inventories, receivables, etc.,

FLUCTUATING OR SEASONAL ASSETS

-These are current assets that vary over the year due to seasonal or cyclical needs.
inventories before Christmas (Christmas decors) School supplies during opening of classes Flowers during Valentines Day

TOTAL ASSET REQUIREMENT OVERTIME

Seasonal Variation

Total Asset Requirement

Assets
General Growth in fixed assets and permanent Current assets

DIFFERENT POLICIES FOR FINANCING CURRENT ASSETS

Policy I Flexible Financing Policy

Policy II Restricted Financing Policy

Policy III Compromise Financing Policy

POLICY I FLEXIBLE FINANCING POLICY

-This involves the decision to finance the peaks of asset requirement with longterm debt and equity.

FOR SCHOOL SUPPLIES FIRM:

Rise

Inventory and current asset

Decline

Sell

Marketable Securities

Reinvest

POLICY I FLEXIBLE FINANCING POLICY

Total Asset Requirement

Seasonal Variation
Long-term Debt and Equity
General Growth in fixed assets and permanent Current assets

Marketable Securities

Time

POLICY II RESTRICTED FINANCING POLICY

-This involves the decision to finance the valleys or troughs of asset, with long term debt and equity.

POLICY II RESTRICTED FINANCING POLICY Total

Asset Requirement

Short term Financing

Seasonal Variation Pesos

General Growth in fixed assets and permanent Current assets

Long-term Debt and Equity

Time

POLICY III COMPROMISE FINANCING POLICY

involves a firm financing the seasonally adjusted average level of asset demand with long term debt and equity.
-This

POLICY III COMPROMISE FINANCING POLICY

Short term Financing

Seasonal Variation Pesos

General Growth in fixed assets and permanent Current assets Long-term Debt and Equity

Marketable Securities
Time

Which Financing Policy Should be Chosen?

There is no definitive answer.

The following should be considered:

Maturity Hedging Cash Reserves Relative Interest Rates

Availability and Costs of Alternative Financing

Impact on Future Sales