If we could accurately forecast interest rates, financing decisions would be easy. Although it's difficult to predict future interest rate levels, it is easy to predict that interest rates will fluctuate. Therefore, sound financial policy calls for using a mix of long- and short-term debt as well as equity to position the firm so that it can survive in any interest rate environment.

The firm's optimal financial policy depends on the nature of the firm's assets—the easier its assets can be sold, the more feasible it is for the firm to use __ -term debt.

Consequently, it is logical for a firm to finance current assets with _ -term debt and to finance fixed assets with ___ -term debt.

Businesses manage a variety of current assets. Permanent current assets are needed for the firm to maintain its business, and they will be carried even through downturns in business cycles. Temporary current assets fluctuate seasonally or with business cycles. Each organisation must devise an optimal financing strategy that best fits its business situation and best manages its risk

It is thus logical to ensure that:

All fixed assets and the nonseasonal portion of current assets, as well as seasonal needs of current assets, are best financed with long-term capital.

While seasonal needs of current assets are financed with short term loans.