Working Capital Part 2-Current Asset Financing Strategy
Tuesday, 23 March 2010 21:15
Developing a Current Asset Financing Strategy with CNF Exchange
As every small business owner knows, the commercial marketplace is constantly changing and offers ongoing challenges for financing current assets and developing a workable long term financing strategy. CNF Exchange specializes in helping businesses find the current assets financing solutions they need to manage risk return in current assets. Whether your business practices a conservative asset financing policy or a more aggressive current assets financing policy, you can find workable options for managing cash flow and financing assets for your business more effectively.
- The easy-to-use CNF Exchange interface allows you to manage the financing of current assets with lending solutions that are suited to your company's unique needs. We can help you in financing working capital strategies and developing a current assets financing policy that works for the future of your business.
Current assets can be temporary (seasonal) or permanent. Permanent current assets can be defined as the base level of cash, accounts receivable (A/R), and inventory and are determined by their low point through several sales cycles. Temporary current assets are sudden increases in A/R and inventory due to spikes in sales. The current asset financing strategy focuses on determining the best method of financing both temporary and permanent current assets.
Given the temporary and permanent nature of current assets, they can be financed with either short- or long-term sources of funding, however, there is a risk/return trade-off. Short-term financing (or lines of credit) typically costs less than long-term financing, however, greater use of short-term financing results in a greater risk. Lines of credit are more susceptible to interest rate risk (changing rates) and to the risk that it may not be renewed.
There are three current asset financing strategies- maturity matching, conservative, and aggressive:
1. Maturity Matching Financing Strategy
- This strategy finances permanent current assets and fixed assets with long-term sources and temporary current assets with short-term sources.
2. Conservative Financing Strategy
- In this strategy, only a portion of temporary current assets are financed with short-term sources. Long-term financing is used to fund the other portion of temporary current assets along with the permanent current assets and fixed assets.
3. Aggressive Financing Strategy
- Using an aggressive financing strategy, a company will finance a portion of permanent current assets and all temporary current assets with short-term sources. Long-term financing is used to fund the other portion of permanent current assets and fixed assets.
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