Assets funding strategy
| Assets funding strategy |
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Assets funding strategy - determines how the company meets the fixed and variable demand for funds that finance assets. It therefore determines the overall business strategies of corporation.
Types of assets funding strategies
Conservative strategy comes down to funding permanent assets by equity or using long-term bank loan. Seasonal company needs are also financed using a long-term capital (equity and long-term bank credit). It is important to maintain high liquidity. Because long-term loans has generally higher interest rates than short-term, by such structure of assets financing company is not able to fully exploit the opportunities created by the financial leverage, and consequently it leads to increased costs.
Aggressive strategy is used to finance the fixed level of assets using of short-term loan. The advantage of this strategy is to minimize the cost of financing current assets (resulting from lower interest rates on short-term loans) and to improve return on equity (resulting in turn from the use of the financial leverage). The downside of this strategy is the risk of rising interest rates and the difficulty of obtaining additional credit. Consequently, it can lead to problems with timely settlement of obligations.
Moderate strategy is a combination of conservative and aggressive strategies. Consist of actions aiming to adjust the length of the period for which capital is acquired to the length of the "lifetime" of the assets financed by them. This strategy provides the best chance of maintaining financial liquidity, as it allows time synchronization of cash flow expenditure and revenue.
Selection of the optimal strategy
Conservative asset management strategy is accompanied by a low risk, but also it results in low incomes. Adopting an aggressive strategy is associated with increased risk, but it allows to achieve larger gains. Moderate strategy is best suited for managers with moderate propensity for risk. This is because it accepts the possibility of achieving a reasonable profit, while maintaining a moderate level of risk.
See also:
References
- Myers, S. C. (1984). Finance theory and financial strategy. Interfaces, 14(1), 126-137.
- Hillier, D., Grinblatt, M., & Titman, S. (2011). Financial markets and corporate strategy (No. 2nd Eu). McGraw-Hill.
- Kochhar, R. (1997). Strategic assets, capital structure, and firm performance. Journal of Financial and Strategic Decisions, 10(3), 23-36.
