The purpose of this write up is the discussion of how short-term funding can be used to aid business profitability. In order to achieve this objective, various sources of short term funding will be evaluated with a view to underscore the relative advantages and disadvantages. I will also recommend factors to consider before using short term funding.
The key purpose of any business venture is return. This can come in various forms such as profit maximization; maximization of contribution, shareholders wealth maximisation among others. These strategic objectives usually come in sizes depending on the nature of the business or organisation.
Lofty as strategic decisions may be, the importance of having adequate and efficient funding to support it cannot be over-emphasised. It has been shown again and again that one of the main reasons why business fails is the miss-matched of funding. Experience has shown that when you use your working capital (a form of short-term fund) to finance a capital project, the ability to run the business as a going –concern into a foreseeable future becomes shaky due to cash-flow problems.
Funding a business that requires a short-term funding with a long-term financing is a sure way to exist the market arena in an unceremoniously. It is therefore critical to have a right mix of fiancé to boost productivity and enhance competitive advantage.
Table of Contents
INTRODUCTION
DEFINITION OF KEY TERMS
TYPE OF SHORT TERM FUNDING
Owner’s Capital
Esusu
Business Overdraft
Loans From Family, Friends and associates
Trade Creditor
Debt Factoring And Invoice Discounting
GUIDE TO USING SHORTERM FUNDING
Make a clear vision and mission statement
Evaluate the options
Payback Period of the Investment
Processing duration
Inflation
Interest Rate
CONCLUSIONS
Objectives & Core Themes
The primary objective of this work is to explore how short-term funding can be strategically utilized to enhance business profitability, while addressing the common pitfalls associated with funding mismatches.
- Analysis of diverse short-term financing sources and their specific pros and cons.
- Evaluation of the critical importance of matching funding types to business transaction nature.
- Development of guiding principles for informed investment decision-making.
- Discussion on the impact of interest rates, inflation, and repayment terms on business sustainability.
- Strategic recommendations for risk management and financial planning in start-ups.
Excerpt from the Book
TYPE OF SHORT TERM FUNDING
A. OWNER’S CAPITAL
This is the commonest and first point of call for any entrepreneur and start up businesses. It is the capital from personal savings accessible to the owner for investment need. Usually, outside investors would expect the owner to have trust in his/her venture first before attracting their funds.
In most cases, new businesses will find it almost impossible to find prospective investors unless they have committed some form of personal investment. This will also be applicable to those who would like to borrow from financial institutions to finance their new business. For example, if a start-up entrepreneur is not prepared to make their own initial seed of capital contribution then why should anyone else risk their capital? Starting your business with your own money first is a pathway to attract investors and demonstrate that you are willing to commit fully to the new business.
Summary of Chapters
INTRODUCTION: Discusses the strategic importance of efficient funding and warns against the risks of mismatched financing in business operations.
DEFINITION OF KEY TERMS: Clarifies essential financial terminology used throughout the text, such as short-term, long-term, profit, cash, and risk.
TYPE OF SHORT TERM FUNDING: Provides a detailed evaluation of various funding sources, including personal capital, community-based cooperatives, bank overdrafts, and trade credit.
GUIDE TO USING SHORTERM FUNDING: Offers practical principles for evaluating investment decisions, emphasizing vision, strategic planning, and the importance of matching funding to project duration.
CONCLUSIONS: Summarizes the necessity of objective evaluation and expert consultation to ensure funding choices support long-term business goals.
Keywords
Short-term funding, Business Profitability, Working Capital, Investment Financing, Financial Management, Capital Structure, Risk Management, Trade Credit, Debt Factoring, Business Overdraft, Financial Planning, Interest Rates, Inflation, Entrepreneurship, Asset-Liability Matching
Frequently Asked Questions
What is the core focus of this publication?
The work focuses on the strategic application of short-term funding and how businesses can utilize these financial instruments to maintain liquidity and boost overall profitability.
Which thematic areas are covered?
The text covers various funding sources like owner's capital, informal community loans, bank overdrafts, and trade credit, alongside strategic guidelines for financial decision-making.
What is the main goal or research question?
The primary goal is to examine how different short-term funding options can be best employed to improve business performance while avoiding the dangers of poor capital-structure planning.
Which scientific or analytical methods are used?
The author employs a descriptive and comparative analysis of financial funding sources, weighing their respective advantages and disadvantages within the context of business life cycles.
What is addressed in the main body?
The main body evaluates specific types of funding, explores their risks and benefits, and provides a framework of parameters—such as payback periods and interest rates—for making informed financing choices.
Which keywords best characterize this work?
Key terms include short-term funding, working capital, investment financing, risk management, and financial decision-making.
How does the author define the relationship between "short-term" and "long-term" funding?
The author advocates for the "matching principle," suggesting that short-term needs must be met with short-term funding and long-term needs with long-term funding to ensure operational responsiveness.
Why does the author caution against relying solely on bank loans for start-ups?
The author highlights the potential for excessive documentation, high interest rates, and the risk that banks may withdraw credit facilities, which can jeopardize a new business.
What role does the "Esusu" system play in the context of this book?
It is presented as an example of community-based cooperative funding that provides a convenient and trust-based platform for members, though it carries risks related to lender default.
- Quote paper
- Michael Oluwadare Idowu (Author), 2013, Short-Term Funding. An Effective Device to Aid Business Profitability, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/301384
