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Financing decisions last one.docx - 4 Financing decisions...

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4. Financing decisions: Making the decision between short-term and long-term finance No single ideal financing package can be recommended as it all depends upon the risk appetite and the perceived risk/return trade-off of each individual business. Businesses may be categorised as having aggressive, average or defensive positions in this area • An aggressive company has more short-term credit than equity; it may return a higher profit but at the cost of greater risk. • An average company matches its maturities, so it has less risk than in the aggressive company but less return as well: – permanent current assets are financed by long-term debt – fluctuating current assets are financed by short-term credit. • A defensive company sacrifices profitability for liquidity by having little short-term credit, which finances only some of the fluctuating current assets. This is a low-risk, low return company. The financing choice must be made by the management of the individual business, bearing in mind the willingness of suppliers of finance to lend and the risk of its industrial sector. Balancing short-term and long-term finance • Every business has immediate, short-term, medium-term and long-term needs for finance, and each one faces risk in the way it finances itself.
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