Forms of Short-term Financing/Preparing to Borrow Needed Funds
Preparing to Borrow Needed Funds
[edit | edit source]Financial statements must be available for internal and external purposes. The financial statements represent the company and tell the story of its history to others. Companies with good financial statements have a better chance of getting credit from all available sources. The better the financial statements are, the lower the credit risk is, creating more favorable financing options for a buyer. To qualify for any financing option, a buyer will need to meet the requirements of the funding provider. The company’s financial plan determines what options will be available. Thus understanding and properly preparing a good financial plan is primary. It is not essential to understand a balance sheet in its entirety, but it does help to have an understanding of the relationships between some of the items listed on the balance sheet and income statement since lenders look very carefully at these relationships. The key matter is the relationship of the accounts receivable to sales and the transition to cash:
- Accounts receivable are a desirable asset. Banks and factors scrutinize these because accounts receivable provide collateral for the basis of a loan.
- Sales are the outcome of extending payment terms which then create accounts receivable.
- Inventory is decreased, and cost of sales is increased.
- Cash is generated when a buyer pays the obligation (accounts receivable).
- Sales are the primary goal, and profits are the desired end results.
The end result of the difference between sales and cost of sales is loss/ profit that flows into the company (debit if loss, credit if profit).