(1) MATCHING OR HEDGING APPROACH/POLICY

• This approach or policy is a moderate policy that matches assets and liabilities to maturities.

• Basically, a firm uses long term sources to finance fixed assets and permanent current assets and short term financing to finance temporary current assets

• Simple illustration:

• A fixed asset/equipment which is expected to provide cash flow for 8 years should be financed by say 8 years long-term debts

• Assuming a firm needs to have additional inventories for 2 months, it will then sought short term 2 months bank credit to match it.

(2) CONSERVATIVE APPROACH/POLICY

• Conservative because the firm prefers to have more cash on hands

• Fixed and part of current assets are financed by long-term or permanent funds

• As permanent or long-term sources are more expensive, this leads to “lower risk lower return”

• Having excess cash at off-peak period hence the need to invest the idle or excess cash to earn returns.

(3) AGGRESSIVE APROACH/POLICY

• The firm want to take high risk where short term funds are used to a very high degree to finance current and even fixed assets