Funding Policy

Question 1

Funding policy

Answer 1

Here are the smart notes:

Working Capital Policy Approaches

1. Aggressive Policy: Minimizes working capital, increasing risk.
2. Conservative Policy: Maintains adequate working capital, reducing risk.

Financing Working Capital

1. Permanent Working Capital: Minimum level required at all times.
2. Fluctuating Working Capital: Temporary requirements, varying with the trade cycle.

Funding Policies

1. Conservative Funding Policy: Finances permanent assets with long-term funding.
2. Aggressive Funding Policy: Uses short-term financing for fluctuating and some permanent assets.
3. Moderate Funding Policy: Matches short-term finance with fluctuating assets and long-term finance with permanent assets.

Benefits and Risks of Short-Term Finance

Benefits:

• Lower cost
• Greater flexibility

Risks:

• Short-term finance runs out quickly and must be renewed.
• Bank overdraft facilities can be withdrawn at any time.