Financial Policy

02/09/2022 0 By indiafreenotes

Financing Policy refers to the decisions, choices, or regulations related to the financial system 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 firm’s value for its stakeholders.

Types of Financing Policy

Hedging Policy

Hedging policy involves offsetting the finance for an asset with a liability that matures on the asset’s expected life. For example, a business wants to purchase machinery having an expected life of 20 years. It can do so by financing the asset with a 20-year loan. This way, the asset and liability both will mature in the same period. The purpose of the hedging policy is to match the assets and liabilities during the relinquishing period.

Conservative Policy

An organization’s attempt to match the assets with the liabilities is not always possible. In such situations, the business uses a conservative financing policy. In this policy, the firm uses more long-term sources of finance and less short-term finance to purchase its asset. The business acquires permanent and current assets using long-term sources of finances. Only a part of short-term finance is used to finance its temporary current assets.

Aggressive Policy

Aggressive financing policy comprises of relying more on short-term sources of finance than long-term sources. It is termed an aggressive policy because it is riskier as it involves the continuous renewal of the borrowing. In this policy, the firm finances its permanent current assets using short-term sources of finance.

Highly Aggressive Policy

A highly aggressive financing policy is one where long-term sources finance the major part of the permanent asset, and short-term sources finance a minor portion. It is a common assumption that the firms which follow this policy are nearing their closure and are termed as “sick.”

Depending upon the strategy and requirements of the organization, it can adopt different types of financing policies. However, there are different aspects that businesses should consider while making decisions relating to financing policy.

Benefits of financial policies and procedures

It might seem daunting but creating financial policies and procedures manual can have many long-term benefits for your business.

For example, your manual will:

  • Ensure all staff are aware of their obligations
  • Help your managers and supervisors make consistent and reliable decisions
  • Give employees a clear understanding of what you expect and allow
  • Reduce disputes
  • Add to the professionalism of your business

Creating financial policies

Policies provide an overview of certain rules that you have in your business. They should:

  • Align with business goals and plans
  • Reflect the culture of the business
  • Be flexible
  • Be easily interpreted and understood by everybody in the business