Financial Management: Principles and Applications, 13/e

18.2 Working-Capital Policy

Managing the firm’s net working capital involves deciding on a strategy for financing the firm’s current assets and current liabilities. Because each financing source comes with advantages and disadvantages, the financial manager must decide on the sources that are optimal for the firm.

The Principle of Self-Liquidating Debt

A benchmark that is often used for setting working-capital policy is the principle of self-liquidating debt. This principle states that the maturity of the source of financing should be matched with the length of time the financing is needed.1 Following this policy, a seasonal expansion of inventories prior to the Christmas season should be financed with a short-term loan or current liability. ...