## Financial Needs and the Matching Principle

### Three Types of Financial Needs

Type	Duration	Purpose	Examples
Long-term	> 5 to 10 years	Fixed assets + permanent working capital	Land, Building, Plant & Machinery
Medium-term	1 to 5 years	Semi-permanent operating assets	Critical spares, Tools, Dies, Moulds, Store & spares
Short-term	< 1 year	Working capital / current assets	Stock, Debtors, Cash

### The Matching (Hedging) Principle

> Short-term needs → Short-term sources

> Medium-term needs → Medium-term sources

> Long-term needs → Long-term sources

Funding a long-term asset with short-term debt creates refinancing risk — a core concept in FM.

### Source Selection by Business Stage

Stage	Uncertainty Level	Preferred Sources
Early Stage	High	Equity (mainly Angel Funds)
Growth Stage	High to Moderate	Equity, Venture Capital, some Debt
Growth→Stable	Moderate to Low	Debt, Venture Capital, Private Equity
Stable Stage	Low	Debt

### Three Ways to Classify Financial Sources

1. Based on basic source (internal vs external)

2. Based on maturity of repayment period (short/medium/long-term)

3. Based on ownership and control (owner's funds vs borrowed funds)

Worked example

### Example 1

Example: A startup uses angel funding (equity) to buy machinery worth ₹50 lakh — appropriate because high uncertainty means no lender will extend long-term debt, and equity has no repayment obligation.

### Example 2

Example: A retail firm finances its seasonal stock purchase (3 months) using a cash credit facility (short-term) — correct application of the matching principle. If it had used a 10-year bond instead, funds would remain locked beyond need.

⚠️ Common exam mistakes

Stating long-term is 'more than 1 year' — long-term is specifically more than 5–10 years; medium-term is 1–5 years.
Forgetting that permanent working capital (hardcore WC) is a long-term need, not short-term.
Not linking stage of business to type of source — examiners test this table specifically.

Reference:

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Financial Needs, Duration, and Matching Principle

Worked example

⚠️ Common exam mistakes