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Short-Term Financing And Its Implications On Solvency And Profitability Of Company

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  • Eleonora Kontus

    (The Town of Kastav, Kastav)

Abstract

The purpose and aims of this paper are to explore short-term financing of companies, its impact on profitability and solvency, then to determine which sources of short-term financing to employ, based on the lowest cost criteria, and lastly, to prove the importance of scientifically-based management of short-term financing. The company should bear in mind the cost of available sources expressed as a comparable Effective Interest Rate After Tax (EIRAT) and decide on the optimal composition of the company's short-term sources from a cost-effective point of view with regard to EIRAT. To determine what sources of short-term financing to employ, a firm should take into consideration the cost of the sources, the impact of short-term sources on solvency and profitability and decide on the optimal composition of the firm's short-term liabilities from an economic, solvency and profitability aspect. On the basis of research results, a model of optimal short-term financing has been developed whereby a company can select the optimal composition of short-term sources from a cost-financing, solvency and profitability standpoint.

Suggested Citation

  • Eleonora Kontus, 2011. "Short-Term Financing And Its Implications On Solvency And Profitability Of Company," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 20(2), pages 443-468, december.
    • Handle: RePEc:avo:emipdu:v:20:y:2011:i:2:p:443-468
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    More about this item

    Keywords

    short-term financing; profitability; solvency; effective interest rate after tax; model of optimal short-term financing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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