How does long-term financing policy affect short-term financing requirements?

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How does long-term financing policy affect short-term financing requirements?



Answer: The nature of the firm's short-term financial planning problem is determined by the amount of long-term capital it raises. A firm that issues large amounts of long-term debt or common stock, or that retains a large part of its earnings, may find that it has permanent excess cash. Other firms raise relatively little long-term capital and end up as permanent short-term debtors. Most firms attempt to find a happy balance by financing all long-term assets and part of current assets with equity and long-term debt. Such firms may invest cash surpluses during part of the year and borrow during the rest of the year.

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