ISBN: 0-03-028931-9

Chapter 17 Financing Current Assets

Sound Working Capital Policy Requires Appropriate Financing

The last chapter discussed steps firms can take to improve their working capital management, thus reducing their current assets as a percentage of sales through the use of new technology and improved management techniques. Still, most companies must hold large amounts of current assets, and this investment must be financed in some manner. This involves "working capital financing policy," the focus of the current chapter.
Most firms use several types of short-term debt to finance their working capital requirements. Included are bank loans, trade credit, commercial paper, and accruals. However, the structure of its current liabilities depends on the nature of a firm's business. For example, the sales of Toys R Us are seasonal – nearly half of all sales occur in the final three months of the year. To meet holiday demands, Toys R Us must dramatically increase its inventories during the summer and early fall. This inventory buildup must be financed until after Christmas, when collections bring in cash and debts can be reduced. The company finances the buildup with trade credit, loans from U.S. and foreign banks, commercial paper, and the sale of marketable securities built up during the slack season.
Short-term credit is generally cheaper than long-term capital, but it is a riskier, less dependable source of financing. Interest rates can increase dramatically, and changes in a company's financial position can affect both the cost and availability of short-term credit.
After you have completed this chapter, you will have a better understanding of the ways corporations finance their current assets, and of the costs associated with each type of financing.

Toys R Us
Stock quote
Recent news

Return to Chapter

Copyright © Harcourt College Publishers, A Harcourt Higher Learning Company. All rights reserved.