Financing Strategies

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

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.


Last updated on : July 31st, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Revenue vs. Profit
  • Functions of Financial Management
  • Financing Policy
    Financing Policy
  • Profit Maximization or Maximization of Profits
    Profit Maximization
  • How Macro Environment affects Financial Management Decision
    How Macro Environment affects Financial Management Decision?
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    payback definemodigliani miller approach of capital structuredifference between rent to own and land contractmeaning of sweat equitywealth maximizationnwc investopediabank debenture definitionimpairment ifrsfeatures of convertible securitiescurrent liabilities formulainventory turnaroundearnings multiplier approachhow to calculate interest earned ratioadvantages of payback period methodactivity ratios formulasequity valuation dcfincremental expensesdefinition of debit in accountingstock turnover ratio exampleifrs capitalization rulesreceivables turnover ratiocredits and debits in accountinghow to calculate nopat from income statementwhat is the dupont formuladividend irrelevancecapital lease vs operating lease taxworking capital vs current ratiocapital leases definitioncalculating growth rate of stockwhich of the following is a disadvantage of debt financingconversion ratio for convertible bondsnpv and payback periodmerging and acquisition definitionwhat is nopatwhat is acid test ratio formulaoperating lease journal entriesus gaap capitalizationwhat is trade credit advantages and disadvantagesfixed and variable expenses definitioncapm cost of equity formulairr interpolation formulagross profit margin ratio formuladefine sundry creditorspercentage of sales methodcash vs accrualhypothecatingwhats a debenturewhat does irr mean in financehow to interpret debt to equity ratioshareholder wealth maximizationfuture value and present value tablesdifference between land contract and rent to owninvested capital turnover ratiohow do you calculate irr by handcapital shortage definitionoperating profit vs ebitmodified irr calculatorestimating wacccash operating cycle definitionwhat is mirr in financewhat is sg&adifference between pledge hypothecation mortgage and lienintrinsic value of a bond formulafuture value interest factor formulaexample accounting equationproject selection under capital rationingadvantages and disadvantages of credit salesdebt covenant definitiondefine dividend per sharedefine availingadvantages of npv over irrsimple pay back periodhow to calculate ebitda from net incomecapital budgeting criteriasales maximisation tutor2ucommon size statement value of inventory formula