Maturity Matching, or “Self-Liquida

Maturity Matching, or “Self-Liquidating,” Approach
The maturity matching, or “self-liquidating,” approach calls for matching asset
and liability maturities as shown in Panel a of Figure 16-2. All of the fixed assets
plus the permanent current assets are financed with long-term capital, but temporary
current assets are financed with short-term debt. Inventory expected to be sold in
30 days would be financed with a 30-day bank loan; a machine expected to last for
5 years would be financed with a 5-year loan; a 20-year building would be financed
with a 20-year mortgage bond; and so on. Actually, two factors prevent an exact
maturity matching: (1) The lives of assets are uncertain. For example, a firm might
finance inventories with a 30-day bank loan, expecting to sell the inventories and
use the cash to retire the loan. But if sales are slow, then the cash would not be forthcoming
and the firm might not be able to pay off the loan when it matures. (2) Some
common equity must be used, and common equity has no maturity. Still, if a firm
attempts to match or come close to matching asset and liability maturities, this is
defined as a moderate current asset financing policy.