The financial policy is represented by a specific (financial) ideology aimed at achieving the main goal of the economic activity of the enterprise - making a profit. Short-term and long-term financial policies are structural elements of the general financial policy of a business entity. Moreover, they are responsible for various areas of the enterprise.
Long-term financial policy inherently covers absolutely the entire life cycle with a full description of its phases of growth, decline, maturity and the withdrawal of capital to the most necessary places. The long-term cycle is divided into a large number of short-term periods, the duration of which is equal to one financial year. For each individual year, its own short-term financial policy of the enterprise is formed.
These two types of policies have their own different application areas. Long-term financial policy focuses on the investment activities of the enterprise (long-term financial and capital investments), while the short-term main focus is on the current activities of the business entity.
There are differences between these two components of financial policy in conjunction with strategic directions in the market. Short-term financial policy contributes to the solution of problems in the settlement of offers of services and goods within a year, long-term financial policy should ensure the company’s place in the market, based on changes in the quality, quantity, range of these services and goods.
Working capital management in the long run boils down to solving two main problems:
- determination of optimality in the structure and size of current assets of liabilities;
- providing through various forms of funds to cover the financial needs of working capital.
Long-term financial policy in comparison with short-term has various management objects. The financial policy in the short term manages working capital, and long-term - the main, which can be represented by a combination of working capital and non-current capital.
From the standpoint of performance criteria, these two concepts compete with each other. Short-term financial policy considers the achievement of the maximum level of profit as an assessment of effectiveness, and long-term - the maximum benefit from investment investments.
These criteria give rise to differences between short-term and long-term financial policies in determining strategic objectives. So, in the implementation of the last main strategy, it is considered to be the achievement of productivity, the increase in capacity and fixed assets, as well as capital is considered not from a financial position, but in physical form, which can be measured as production capacity.
A short-term financial policy is responsible for the implementation of production tasks within the available capacities while ensuring flexible financing, the formation and accumulation of own financial sources and working capital and non-current capital.
Along with the differences in these two financial policies, there is a connection between them. Short-term can be considered an “embedded” part of long-term financial policy. Indeed, the directions of expansion of production activities, the release of free funds for further investment in the production process, which are the main factor in long-term planning, are formed in the process of current activities of a business entity.