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Alternate Sources of Capital |
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Written by Editor
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Monday, 08 August 2005 |
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Page 1 of 6 Understanding Money Sources
- Your need for capital is always continuing and at points, never seems to end
- You will need capital to get sales, buy inventory, pay your employees, purchase assets, pay taxes, and on and on
- The more your business grows, the more capital you will continue to need
- These are some of the most common reasons that the need for capital arises:
- Sales growth requires inventories to be built to support the higher sales level
- Sales growth creates a larger volume of accounts receivable
- Growth requires the business to carry larger cash balances in order to meet its current obligations to employees, trade creditors, and others
- Expansion opportunities such as a decision to open a new branch, add a new product, or increase capacity
- Cost savings opportunities such as equipment purchases that will lower production costs or reduce operating expenses
- Opportunities to realize substantial savings by taking advantage of quantity discounts on purchase that will lower production costs or reduce operating expenses
- Opportunities to realize substantial savings by taking advantage of quantity discounts on purchases for inventory or building inventories prior to a supplier’s price increase
- Seasonal factors, where inventories must be built before the selling season begins and receivables may not be collected until 30 to 60 days after the selling season ends
- Current repayment of obligations or debts may require more cash than is immediately available
- Local or national economic conditions which cause sales and profit to decline temporarily
- Economic difficulties of customers that can cause them to pay more slowly than expected
- Failure to retain sufficient earnings in the business
- Inattention to asset management may have allowed inventories or accounts receivable to get out of hand
Combination
- Very often, the cause cannot be entirely attributed to any factor, but results from a combination
- For example, a growing, apparently successful business may find that it does not have sufficient cash on hand to meet a current debt installment or to expand to a new location because customers have been slow in paying
Short-Term Capital
- Capital needs can be classified as either short-term or long-term
- Short-term needs are generally those of less than one year
- Short-term financing is the most common for assets that turn over quickly—i.e. accounts receivable or inventories
- This is common in seasonal businesses that build inventories in anticipation of selling requirements and do not collect receivables until after the selling season
- This is also common for contractors with substantial work-in-process inventories prior to receiving payment
Long-Term Capital
- Long-term needs are those of more than one year
- Long-term financing is often associated with the need for fixed assets like property, manufacturing plants, and equipment where the assets will be used within the business for several years
- It is also a practical alternative in many situations where short-term financing requirements recur on a regular basis
Recurring Needs
- A series of short-term needs are often viewed as a long-term need
- The additional of long-term capital should eliminate the short-term needs and the crises that could occur if capital were not available to meet a short-term need
Steady Growth
- If the need for additional capital grows continually without any significant pattern—i.e. in the case of a company with steady sales and profit from year to year—long-term financing is probably more appropriate
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