Business

Understanding the Various Financial Needs of Your Business

VARIOUS FINANCIAL NEEDS OF YOUR BUSINESS

Contents

If we talk about the needs of a company today, we usually refer to the raising of external resources and capital. In other words: the financing that the company needs to develop its projects.

We can classify the financial needs of companies into two main blocks:

  • Financing of working capital (short term) and
  • Investment financing (long-term)

Basically, they differ by terms. We speak of the short term that is up to one year and long term (investments) that are more than one year.

Funders are no longer just banks. In recent years, more actors have appeared that we know as finance companies. Options are increasingly regulated to protect the investor. If companies can solve their financial needs through more “funders”, investors have new possibilities for investment.

Financial needs of companies today

For the development of its maturation cycle, a company must face certain financial needs as a consequence of the acquisition and consumption of certain goods and services.

These needs can be classified into two categories:

Cyclical financial needs

These are those needs whose existence is directly linked to the middle maturation period, renewing at its rhythm. From another point of view, these needs arise as a consequence of having to use resources in each of the maturation cycles, because in each of them they are consumed or transformed.

The expenses (which will give rise to disbursements) that are incorporated into the maturation cycle are as follows:

  • Acquisition of raw and auxiliary materials.
  • Storage costs for these materials.
  • Own costs of the manufacturing process until obtaining the finished product.
  • Storage costs of the finished product.

We have the accounting reflection of these cyclical needs in the following current assets:

  • Stocks: Raw and Auxiliary Materials, Products in progress, Finished Products
  • Accounts receivable from clients.

Acyclic financial needs

They are those that are linked to the assets that remain in the company during various maturation cycles, directly enabling their development (buildings, machinery, furniture, etc.), or, relating to the life cycle of the company (for example, acquisition of participations in other companies for expansion or diversification).

These needs are reflected in the fixed assets. To meet these needs, companies have a wide variety of financial resources, such as the best Virtual Credit Cards for small businesses. We will classify some of these resources into three categories:

  • Cyclical resources: They are those whose existence is directly linked to the maturation cycle and which are renewed at its rhythm. Precisely because of this character, they are also called spontaneous resources because the volume of financing is obtained automatically adapting to variations in the activity of the farm.

In general, these resources come from the deferment of the payment obligation – it is a consequence of the acquisition of materials and services from suppliers, deferred expenses and tax debts.

Another important cyclical resource, but of a different nature, is the commercial discount. However, this resource may not expand at the same rate as the level of activity.

  • Acyclic resources: They are those that in the financial analysis are called permanent capitals. 
  • Treasury resources: These are the additional sources of financing that a company can turn to and that are not included in the two previous categories. We have here, mainly, short-term bank loans and exceptional payment deferrals.

Mutual funds  

The mutual funds are one alternative practical investment for different financial needs of individuals and businesses. In the case of SMEs, its main advantages are accessibility, liquidity, quick settlement, professional management, among others. They are aligned with the typical needs of small and medium-sized companies.

Mutual investment funds are an ideal tool for the diverse financial needs of SMEs, due to their variety and flexibility.

Some of the reasons that SMEs usually use this type of instruments are:

  • First access to financial investments. 

It is common for many projects that are start-ups or entrepreneurs with no economic experience, to pay enough attention to the value of money over time, a key concept of finance and for the survival of a business. It can be a gateway to making investments for its flexibility and simplicity.

  • Placement of short-term surpluses. 

Since it is possible to invest with very low amounts, they are an ideal option so that the money that is available for a time does not lose value or obtain a certain return. In addition, they require less planning than fixed terms, since it is not necessary to immobilize the money for a predetermined time, but it can be deposited and withdrawn as necessary.

  • Work tool for the finance area. 

If the company already has a finance area or manager, the funds can help fulfil the investment aspects of their functions.

  • Liquidity. 

If we consider the daily cash flows that SMEs have, this investment tool offers them immediate liquidity or a very short term one.

  • Support in financial management. 

With or without a specific area, SMEs need to carry out professional financial management. Investment funds, managed by experts, provide access to opportunities and information for finance professionals.

  • Investments for the future. 

They are an ideal flexible instrument for depositing savings intended for future purchases, payments or investments.

  • Reserve funds.

Every SME needs to be prepared with available money for urgent or unexpected needs. In a money fund it is possible to hold easily accessible reserves, but in better conditions than in cash or in an account.

Conclusion

Until now the only ones that financed the companies were basically the banks and in some cases the public administrations. The only existing way to invest in companies until now was to do it directly through stocks and corporate fixed income.

However, today, there are more ways to do it. Perhaps you are not aware of it, but if you invest in investment funds, you are investing in companies. Even your pension plan may be investing a portion in fixed income or stocks. Take a look at the composition of your portfolio and you will see.

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