Meaning of Financing Strategies
A financing strategy establishes the fundamental steps of how an organization can achieve its financing targets, be it short term or long term. It involves a strategic plan as to how the organization can finance its overall operations. An ideal financing strategy must serve as a guideline for the employees of an organization in conducting the day to day finances.
Example of Financing Strategies
Some of the popular examples of financing strategies for giving a head-start to your business are as follows:
- Debt Financing: This financing strategy lets you borrow money from banks or other lending institutions for using it in your business. The organization can repay the loan along with an interest depending on the terms of the contract.
- Equity Financing: This financing strategy involves financing from investors also called as “venture capitalists”. These investors agree to assist you in your business plans in lieu of ownership of a portion of your organization with their venture funding.
- Personal Financing: This is the less formal financing strategy whereby you can cater to your funding needs by asking your friends and family. This is very effective if you are a small business start-up.
Financing Strategies of Current Assets / Financing Strategies of Working Capital
An organization can finance the Current Assets / Working Capital by using the following financing strategies:
- Matching Approach: As per this financing strategy, the organization matches the expected life of the current asset with the estimated life of the source of fund to raise these financial assets. For example, a machine whose life expectancy is 5 years can be funded using a loan of 5 years. The flip side of using this approach to finance your assets is that it may not be practically possible to match the life of an asset with that of its source of fund.
Similarly, for working capital financing, the matching approach aims to match the assets and liabilities to maturities. Thus, for every asset on the balance sheet, there is a corresponding liability that matures on the same day as the asset.
- Conservative Approach: As per this financing strategy, the organization relies on the long-term funds to acquire permanent assets and a part of temporary assets. As this financing strategy uses long-term funds, it has less risk of a shortage of immediate funds.
For working capital financing, this financing strategy requires an organization to maintain high levels of current assets in relation to its sales. Such surplus current assets can incorporate any changes in the sales and thus avoid disruption in the production plans.
- Aggressive Approach: As per this financing strategy, the organization uses its short-term funds to finance a part of its permanent assets. This is a very risky approach as there are chances that the organization might have a hard time dealing with its short-term obligations. However, many organizations use this financing strategy for its advantages of lower financing cost and higher profitability.
For working capital financing, under this approach, the reliance is on short-term funds that are used for maintaining the current assets. These current assets are maintained only to meet the current liabilities and do not provide any cushion for the variation in working capital requirements.
Financing strategies are imperative for all the organizations to help in planning their financial future. A financing strategy can assist you with setting clear cut goals and working towards becoming a financially secure business organization. It takes into account your current financial status, your financial objectives and the best possible steps to achieve them.