The policy that a firm adopts for short-term finance will be composed of at least two elements:
a) The size of the firm’s investment in current assets. This is usually measured relative to the firm’s level of total operating revenues. A flexible or accommodative short-term financial policy would maintain a high ratio of current assets to sales. A restrictive short-term financial policy would entail a low ratio of current assets to sales.
b) The financing of current assets. This is measured as the proportion of short-term debt to long-term debt. A restrictive short-term financial policy means a high proportion of short-term debt relative to long-term financing, and a flexible policy means less short-term debt and more long-term debt.
