5.2.3: Selecting the Source
The Matching Principle & Strategic Finance Choices
The Golden Rule: Match the timeframe of the need to the duration of the source. Never use short-term finance (overdrafts) for long-term assets (factories). The bank can recall an overdraft at ANY time—imagine losing your factory funding overnight.
The Boardroom Brief
You are the CFO of GlobalTech Manufacturing PLC. The Board has approved THREE strategic initiatives:
- 1.Buy office supplies for $500 (Immediate need, one-time purchase)
- 2.Lease 30 company cars for the sales team ($600,000 over 4 years)
- 3.Build a $10m automated factory in Vietnam (25-year asset life)
Factors Affecting Choice
- Cost: Interest (Debt) vs Dividends (Equity)
- Control: Debt = No dilution. Equity = Loss of voting rights
- Flexibility: Overdrafts flexible, Loans rigid
- Legal Structure: PLCs have more options than Sole Traders
- Existing Debt: High gearing limits borrowing capacity
The Matching Principle
Short-term Need → Short-term Source
Wages (monthly) → Overdraft
Long-term Need → Long-term Source
Factory (25 years) → Mortgage / Share Issue
The Disaster Scenario
Using Overdraft to build a Factory → Bank recalls overdraft → Factory project collapses
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