Often, an entrepreneur does not have enough equity to carry out core business, so he resorts to various kinds of external loans. What is it and how to manage it, we will consider in this article.
The essence of borrowed funds
Borrowed funds - this is a certain part of the working capital of a legal entity, which is not its property and is replenished by attracting commercial bank loans, equity loans or by other means convenient for the entrepreneur. It is important to understand that such injections of a business entity are subject to return.
However, borrowed funds are not provided to all comers, and all the more unreasonably. Therefore, to attract this kind of financial investment, an entrepreneur needs to make some settlement manipulations that prove the need to attract outside capital in favor of his own current assets.
We can say that this is both good and bad. The positive aspects of the loan are that in this way the business entity will be able to quickly get his brainchild out of a crisis state, and at the same time it will establish contact and increase the degree of trust with external lenders. Well, on the other hand, there are some kind of obligations to third-party organizations, which is also not good.
Borrowed funds and the principles of their formation
Each company of a commercial nature exists in order to bring profit to its owners. Therefore, the activities of a business entity should be structured in such a way that the proceeds are sufficient not only to repay obligations to external creditors, but also to increase their own production or other circulating capacities.
The goods turnover must be profitable, otherwise it makes no sense, therefore it is extremely important to understand that the guarantee of a successful loan is when the net profit exceeds the monthly amount payable to its benefactors.
Borrowed funds in their formation are quite diverse, since there are many alternatives that differ in the degree of obligations, the nature of the issue and the timing of the provision of finance. Therefore, special attention should be paid to the choice of a creditor based on the proposed conditions.
Ways of external financing
As mentioned above, borrowing is carried out in any way convenient for the business entity. In modern practice, there are a number of the most common sources of this operation:
- Domestic commercial banking institutions (may provide short-term loans conclude factoring or assignment of claim rights, conduct bill transactions).
- Specialized leasing corporations (carry out property rental operations).
- Various commercial entities (mutual settlements and factoring operations, tollings, commodity loans).
- Investment funds (like commercial banks, are involved assignment of claims and bill transactions).
- State bodies (may give the right to tax deferrals).
- Shareholders and owners (specialize in dividend operations).
Loan management
In order to successfully manage accounts payable, it is imperative to build a competent accounting policy: draw up a planning budget, calculate the borrowing ratio, which, in turn, can show a qualitative and quantitative characteristic of the state of current affairs based on relations with external investors.
When the share of borrowed funds in the company is large enough, a strategic plan should be developed to maintain a financially stable position in the competitive market, so as not to violate agreements with borrowers and not to remain at a loss.
For this, the planned characteristics of existing borrowed funds are also useful, the liquidity ratio plays an important role, indicating the maturity and turnover of the existing capital of the business entity.
The essence of equity
We must understand: on a continuous borrowed capital, it’s not enough not to build a huge financial empire, it is extremely difficult to stay afloat in modern, sometimes tough competitive market conditions. If your capital is not enough to conduct business, it is important that equity and borrowed funds are in the right ratio.
The first, in turn, are already formed current assets that are allocated from the authorized capital of the enterprise, and additional capital may also be involved, which is formed due to the following factors:
- in excess after revaluation of the fixed assets;
- if the enterprise is a joint stock company, then it may have share premium;
- funds can also be received free of charge with the aim of acquiring industrially necessary goods and services;
- various state appropriations provided by the Federal Treasury of the Russian Federation.
Ratio of own and borrowed funds
When attracting third-party capital and its active use for current purposes, it is recommended to monitor the qualitative and quantitative characteristics of the financial stability of the enterprise as a whole. Often, in order to characterize the ratio of own and borrowed funds as accurately as possible, Goering coefficients are calculated by the following formula:
(Amount long term liabilities + Amount current liabilities) / Volume equity.
The resulting figure indicates the dependence of the enterprise on third-party sponsors, while the larger the ratio exceeds 1, the higher the degree of this dependence.
The entrepreneur must understand that for the successful functioning of the business entity, borrowed capital should not “rule the ball” and dictate the conditions for the procurement of goods and services. Therefore, the less the dependence of equity on borrowed funds, the more liquid and profitable the company will be.
