Business Funding and Financial Cycles: A Comprehensive Analysis

Posted on Jan 25, 2025 in Business Administration and Management (BAM)

Sources of Funding

Funding means the liquid resources and financing available to a company to meet its cash needs.

Rating

  1. According to the repayment period:
    • Short-term funding sources (less than 1 year)
    • Long-term funding sources (more than 1 year)
  2. According to whether they have an external or internal origin:
    • Internal funding: Undistributed profits
    • External funding: Social capital
  3. According to whether the means of financing belong to company owners or outsiders:
    • Own financial resources: Capital and reserves
    • External financial resources: Loans and credits

Own Resources

  • Capital: Contributions of partners to form the company.
  • Reserves: Profits retained by the company. Types include legal, statutory, and voluntary reserves. Reserves are profits that remain in the company to make new investments, therefore they are also a form of self-financing.

There is another type of financing called maintenance financing, which comprises:

  • Depreciation: Accounts for the loss of value in fixed assets during the production process.
  • Provisions: Part of the company’s result that creates a fund to meet future potential losses.

When the company ends the year, the final economic result is allocated to depreciation and provisions, taxes, owners, and company reserves.

External Financial Resources: Medium and Long Term

These are resources that the company has for a period longer than the duration of a fiscal year and that, once this time has passed, must be returned with interest. These include:

  • Medium and long-term loans: Loans that companies request from financial institutions.
  • Bonds: Debt securities issued by companies and bought by investors.
  • Leasing: The company can incorporate an asset element into its assets through a lease agreement and has the option to buy it.
  • Renting: A medium or long-term rental of assets, with no option to buy.

External Resources: Short Term

These are short-term credits that allow companies to finance part of their operating cycle. The most used sources of financing are:

  • Short-term loans: The company requests money from a financial institution to cover short-term needs.
  • Bank credit: Two types exist:
    • Overdraft: A less common source of financing based on using a balance higher than that available in an account.
    • Line of credit: The company signs a contract with a financial institution, which makes an account available by issuing vouchers.
  • Commercial credit: Automatic financing obtained when the company buys on credit from suppliers.
  • Discounting of bills: Debts from clients documented in bills can be transferred to a financial institution, which advances the amount minus fees and interest.
  • Factoring: The sale of all credit rights to customers.

Company Cycles

  • Long cycle: Starts with capturing cash resources and investing them in fixed assets. The duration for each fixed asset element is different. The company recovers the money tied up in the investment through depreciation.
  • Short cycle: Also called the operating cycle or maturation period.

Maturation Period

This is the time it usually takes the company to recover the money invested in the production process. It can be broken down into five sub-periods:

  • Average storage period
  • Average manufacturing period
  • Average sales period
  • Average collection period
  • Average payment period