April 18th, 2006
All financial documents, books and people throw around words like ‘long-term’ and ’short-term.’ Some also include the ‘medium-term’ as well. But what do we mean when we throw these terms out?
In classical finance and accounting courses, short term is usually defined as something that will be invested into and divested out of within 1 year. This definition was based on the assumption that the most common financial report available for a company was the annual report.
More modern and advanced finance/accounting classes talk about short term being relative to the period you are describing. For instance, if we are discussing a person’s monthly income, short term would refer to something which takes place in less than one month’s time.
When used outside of a frame of reference, it is safe to assume a person is talking about a 12-month or less time period.
In classical finance/accounting, long term picks up where short term leaves off. So, in the basic sense, long term refers to any project or investment which will take longer than one year to complete.
The more modern definition is complementary to the modern short term definition, and represents periods of time longer than the inferred period. So, back to the monthly income example, if I want to invest this month’s income into a home-improvement project that will take 6 months to complete, I am talking long term.
Medium Term is more of a management-term than a finance/accounting term. It is used mostly to describe something that may straddle both long and short term periods.
For instance, if I am referring to my monthly income (which is short term in all definitions), and I am also talking about how I apply it to my 30-year mortgage (which is long term in all definitions), then using either short- or long-term definitions for my 6-month home improvement project will lead to confusion.
It is in this type of situation that management types, as well as my website, will use the term medium-term, simply to alleviate confusion.
So, in short, you could say the definition of medium-term is ‘not long term and not short term.’
Entry Filed under: Finance Concepts