Borrowing Needs of the Business
One of the most common funding sources of any business, whether a big company or a small one is borrowing. Loans are borrowed for various reasons, depending on a few factors that are really important, which includes profitability of the business. Based on the profit and loss statement, it is clear that the business is making some profit. At the face of it, this business doesn’t need borrowing simply because all its needs are met, and there is spillover, which are profits. The essence of profits from this perspective is to make sure that the current needs in terms of the cost of running a business are met, without having to compromise the profits, otherwise the business will run in loses.
Another factor that determines whether the business should borrow is the cash remaining for the next financial year’s operations (Santone, 2004). . One must consider that the following year the business will need to continue as well. The Profit and loss gives us an idea that the cash for business operations for the following year is guaranteed. For this reason, the business doesn’t need to borrow any money. Of course there’s an exception, for example if the business owners think that the business needs to grow. In that case, the consideration for borrowing some cash for that reason might be valid, and other many factors as well. In this situation however, with all factors held constant, the business the business will not need to borrow, because it is doing fine after all.
Finally, businesses borrow money to reduce the risks involved in the running of a business. Being a small business, the risks are not that much so as to warrant borrowing. The possible risks can be handled by the cash that is pulled back into the business for business operations. The business therefore doesn’t need to borrow any cash for the following month.
Santone, D. (2004). The importance of loans: loans, the important weapon to start your
Business. London: Coffey Publishing
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