Tag: long-term and short-term finance

Financial management, among others, involves decision about the proportion of long-term and short term funds. An organisation wanting to have more liquid assets would raise relatively more amount on a long-term basis. There is a choice between liquidity and profitability. The underlying assumption here is that current liabilities cost less than long term liabilities.

A business cannot function smoothly unless it has adequate funds are made available to them. The need of funds arises from the stage when an entrepreneur decides to start a business. The factors affecting the choice of sources of funds are the cost that it will incur to raise funds, the purpose and the duration for which the funds are to be raised and the risk that a company has to bear to raise those funds.

There are two types of cost that should be taken into account while deciding about the source of funds to be used for an organization. The two types of cost include explicit and implicit cost of the organization.

The financial strength of a business is a key determinant as finance is the life blood of any business. Finances are required by a company to carry out various activities. They can be classified into long-term capital needs and working capital needs.

Short term borrowings offer the benefit of reduced cost due to reduction of idle capital. Short term borrowings refers to the debt which is obtained for an year or less than a year.

Long-term borrowings are generally used for fixed capital needs like plant & machinery, buildings and projects. They are borrowings which exceed 5 years or more. Hence, long-term borrowings are considered a necessity on many grounds.