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The maturity matching principle is the concept that a firm should finance current assets with short-term liabilities and fixed assets with long-term liabilities. Fixed assets have a useful life of a year or more, while current assets are generally used up in less than a year. The maturity matching principle is an important consideration for business liquidity and profitability.
Financing Fixed Assets With Short-Term Financing
Businesses that finance fixed assets with short-term financing run the risk of a cash flow problem. In general, it takes longer for a company to recover its investment in long-term assets. If a business finances a fixed asset with a short-term loan, it may not generate enough cash from the asset to pay off the short-term loan when it comes due. For example, a business that purchases a tractor with financing probably won't generate enough excess cash to pay it off in one or two months.
Financing Current Assets With Long-Term Financing
It doesn't usually make financial sense for a business to finance current assets with long-term financing. Long-term debt is generally more expensive to the firm than short-term debt, while current assets generate less profit on average than fixed assets do. A business that finances current assets with long-term financing often ends up paying unnecessary interest expense -- sometimes long after it derives revenue from the current asset.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.