Categorizing Funding Requirements Essay
Categorizing Funding Requirements
Each requirement should be funded in different ways. In other words, the nature of the funding requirement dictates the preferred type of funding. For example, core funding needs as a general rule will be satisfied by equity funding and, if available, long-term debt. Short-term cyclical funding and contingency requirements usually are satisfied by shorter-term bank lines. Analyzing the total funding needs of the business into these three categories calls for judgment as to which requirements are core and which are cyclical and of short-term or medium-term duration. There is no one correct answer, and much depends on the nature of the company’s business.
For example, a property investment company might categorize funding to pay for completed property developments as core funding for a long-term asset, while a property development company would categorize the costs of a development as cyclical short- to medium-term funding for an asset it confidently will expect to sell on completion of the development.
•The long-term funding requirements of a business are the funds needed to finance its core business assets such as land, buildings and equipment. Every business has core assets, although it is not always readily apparent what they are. For example, the core assets of airline companies at one time were their fleets of aircraft. Now, however, many airlines avoid owning aircraft, preferring to lease them, and their main core assets have become information technology systems and landing slots at airports. Some hotel groups have ceased owning the hotels they manage, and their core assets are the management contracts for hotels that are owned by third parties.
•Most companies are subject to cyclical or seasonal fluctuations in their cash flow, often reflecting a seasonal trading pattern. Even companies with no apparent cyclical influences on cash flow, receiving a relatively constant stream of income, might in reality have a short-term cash flow cycle. They might, for example, accumulate cash receipts at a steady rate throughout each month but make bulk payments (for materials and wages and salaries) only one or two days each month, or just once every quarter (for rent payments). Business cycles, and their associated cash flows, can span several years, for example in the development of agricultural and forestry businesses.
•Contingency funds are to meet unexpected requirements. A company should have access to contingency funding for a number of reasons. There could be an unexpected downturn in one of its markets or the opportunity to make an acquisition. The level of contingency funding depends on such factors as:
•the volatility of the markets in which the company operates •the vulnerability of the earnings stream to market recession •the dependence on one or just a few major customers for achieving sales targets •Management’s desire for growth by making acquisitions.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 16 December 2016
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