Business Life Cycle and Cash Flow
Business Life Cycle and Cash Flow
Some companies may have greater amount of longer term debt than others because such organizations may be taking measures to reduce volatility to unfavorable fluctuation in interest rates. This is because short-term interest rate tends to be more volatile than longer term debt . Companies at their startup stage may want to employ long-term debt for this reason and escape short-term debt burden. Some organizations use more long-term debt because all other sources of financing such as owners’ contributions may have been exploited while these entities have no sufficient retained earnings.
Relationship between Business Life Cycle and Debt Financing
At the first stage of Business Life Cycle (BLC), financing needs of a company are high for business development. Here, companies employ more debt because equity investors may have low confidence in the viability of the business and do not wish to assume non-calculated risk exposure.
When a business grows, relative to current market value, an organization needs more funds for growth in the second stage of Business Life Cycle (BLC). Here, as market confidence in business viability increases, fewer amount of debt-capital is employed where managers invite capital investment from equity market or venture capitalist entities.
At maturity stage of BLC, financing needs are relatively low. So, no new debt or equity stock is issued further. However, at the last (decline) stage of BLC, competitors outperform business rivals and products become obsolete. So, need for external funds (debt) is relatively zero.
Importance of Cash Flow Projections Relative to Debt Financing
Debt financing is all about the management of capital structure and external financing. Cash flow projection is all about making predictions about the cash or liquidity needs of a business. Cash flow projection is more important than debt financing because it highlights how a business will manage its cash inflows and outflows for the ultimate survival .
References
Brigham, E. F. (2011). Student Solutions Manual for Neal/Gustafson/Hughes' Precalculus. Cengage Learning.
Pandey, I. (2015). Financial Management. Vikas Publishing House.
