Financing Policy refers to the selections, choices, or regulations associated with the financial set-up of the organization like payment system, borrowing system, lending system, etc. The policies are framed to introduce financial stability, promote market efficiency, and enhance the worth of the firm for its stakeholders.
A well-made financing policy is very important for the expansion of the organization in the future. A business can show good growth and expand its profitability. If the financial aspects are maintained in a transparent manner. Good governance on financial performance and financial policy ensures higher returns on the capital invested. Every organization frames it's financing policy betting on its functionality, requirements, suitability, and environment during which it's functioning.
TYPES OF FINANCING POLICY
Hedging policy involves offsetting the finance for an asset with a liability that matures on the expected lifetime of the asset. as an example, a business wants to buy machinery having an expected lifetime of 20 years. It can do so by financing the asset by a 20-year loan.
An organization’s try to match the assets with the liabilities isn't always possible. In such situations, the business uses a conservative financing policy. During this policy, the firm uses more long-term sources of finance and fewer short-term finance to buy its asset.
Aggressive financing policy consists of relying more on short-term sources of finance than long-term sources. It's termed as aggressive policy because it's riskier because it involves the continual renewal of the borrowing. During this policy, the firm finances its permanent current assets using the short-term sources of finance.
HIGHLY AGGRESSIVE POLICY
A highly aggressive financing policy is one where the main part of the permanent asset is financed by long-term sources, and a minor portion is financed by short-term sources. It's a typical assumption that the firms which follow this policy are nearing their closure and are termed as “sick ”.
FINANCING POLICY DECISIONS
Investment decisions of the organization depend on the future or short term investment requirements. The long-term investment decision involves investment in capital assets of the organization and also the short-term investment decision involves capital management.
The finance manager of a corporation has to select those sources of finance that end in the optimum, and efficient capital structure. The financing decisions are supported by increasing the wealth of shareholders together with the profitability of the organization.
Distributing dividends is a crucial aspect of the business while determining the financing policy. The main concern while taking dividend decision is determining what proportion profits are available to distribute to the shareholders. The dividend decision must be supported by dividend stability policy and future outlook.
The financing policy of a corporation determines the potential of a business organization. The proper set of plans, policies, and regulations can help the business grow at a rapid pace.
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