Financing Strategies and Policies

1. Strategy o An aggressive financing strategy implies a firm will finance part of its permanent assets and all its current assets using short-term funds. This is in contrast to matching or conservative financing. Matching uses long-term funds to finance permanent current assets and short-term funds to finance temporary, current assets. A conservative financing strategy puts all the permanent and some of the temporary assets in long-term, stable funds.
Benefits
o An aggressive financing policy gives a company benefits in profitability. Short-term funds are less expensive to purchase across the board, so funding costs can be lower. o Risks o The downside of an aggressive financing policy is that it seldom yields the high profitability being sought. Instead, some studies have found an inverse relationship between aggressiveness and profitability. This policy also creates the greatest risk of lack of liquidity.
The aggressive financing strategy is based on hedging or matching which means that company requirements are matched with financing options available. In an aggressive strategy permanent requirements are funded by long term financing and temporary requirements are funded by short term financing. The conservative strategy of financing on the other hand applies long term financing for funding all requirements of a company. The temporary requirements are entirely ignored under this strategy as total requirements are funded by long term financing.
The company estimates the highest level of total requirements in a specific month in an upcoming year and an amount equal to this level is acquired at a long term rate. These funds will cater to the monthly requirements of the company for the whole year as the company has financed the maximum level of monthly requirement. The application of both aggressive and conservative strategies have been described in section C and D and it can clearly be identified that the total cost of financing under the conservative