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Working Capital Management^169

Figure 2: Fluctuating versus Permanent Assets

At the limit, a firm can attempt to match the maturity structure of its assets liabilities
exactly. A machine expected to last for five years could be financed by a five-year
loan ;a 20-year building could be financed by a 20-year mortgage bond; inventory
expected to be sold in 20 days could be financed by a 20-day bank loan ;and so forth.
Actually, of course, uncertainty about the lives of assets prevents this exact maturity
matching. We will examine this point in the following sections.

Figure-2 shows the situation for a firm that attempts to match asset and liability
maturity exactly. Such a policy could be followed, but firms may follow other maturity-
matching policies if they desire. Figure-3, for example, illustrates the situation for a firm
that finances all its fixed assets with ñterm capital but part of its permanent current
assets with short-term credit.

Figure 3: Fluctuating versus Permanent Assets

Time Period

1 2 3 4 5 6 7 8

Dollars

Fluctuating

current assets Short-term

financing

Long-term

debt plus

Total equity capital

permanent

assets

Permanent current assets

Fixed assets

Time Period

1 2 3 4 5 6 7 8

Dollars

Fluctuating

current assets Short-term

financing

Long-term

debt plus

equity capital

Permanent current assets

Fixed assets