Working Capital Management and Financing Policies

Vocabulary flashcards covering matching principles, short-term finance, receivables, cash management, and current asset financing strategies.

Matching Principle

A policy where the maturity of financing sources matches the maturity of assets, supporting fixed assets and permanent current assets with long-term finance, and fluctuating current assets with short-term finance.

Conservative Funding Policy

A funding policy that uses long-term funds to finance fixed assets, permanent current assets, and a portion of fluctuating current assets, resulting in lower risk but reduced profitability.

Aggressive Funding Policy

A policy that uses short-term funds to finance fluctuating current assets and some permanent current assets, carrying the greatest solvency risk while maximizing profitability and shareholder value.

Short-Term Loan

A fixed amount of debt finance borrowed from a bank with repayment due in the near future (e.g., after $1$ year), paying interest at fixed or floating rates at regular intervals.

Trade Credit

An agreement to take payment for goods and services at a later date than when supplied, commonly offering $1$, $2$, or $3$ months of credit.

Credit Standards

The first step in establishing a credit policy, which involves assessing the credit risk of each customer before deciding whether to grant credit.

Credit Terms

The rules set by a firm regarding the length of the payment period and whether to offer a cash discount percentage and discount period.

Collection Policy

The procedures followed after establishing credit standards and terms, such as sending inquiries or charging interest on payments made past the deadline.

3/10 net 60

A credit sales term where the customer receives a $3\%$ discount for paying within $10$ days, otherwise the full bill is due within $60$ days.

Just In Time (JIT) Inventory System

A system where raw materials are purchased and received just in time as needed on production lines, avoiding carrying costs and putting off cash payments.

Flexible Policy

Also known as a conservative policy, a working capital approach where investment in current assets is high, maintaining large cash balances, high inventory, and generous credit terms.

Restrictive Policy

Also known as an aggressive policy, a working capital approach where investment in current assets is low, keeping small cash balances, low inventory, and stiff credit terms.

Moderate Policy

A working capital policy that treads a middle path between aggressive and conservative approaches, characterized relative to policies of similar companies.

Strategy A (CA Financing Policy)

A current asset financing strategy where long-term financing meets fixed asset requirements and peak working capital requirements, with surplus invested in liquid assets during non-peak periods.

Strategy B (CA Financing Policy)

A financing strategy using long-term financing for fixed assets, permanent working capital, and a portion of fluctuating working capital, using short-term financing during seasonal upswings.

Strategy C (CA Financing Policy)

A financing strategy using long-term financing for fixed assets and permanent working capital, and short-term financing exclusively for fluctuating working capital.