The Importance of the Maturity Matching Principle

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The matching principle instructs businesses to use financing that correlates with the life of the asset.
The matching principle instructs businesses to use financing that correlates with the life of the asset. (Image: Wavebreakmedia Ltd/Wavebreak Media/Getty Images)

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.

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