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The Issue Of Maturity and Collections is an End Result

How Are Businesses Financed?

The clear and short answer to this question is that investors put capital in the business. This capital made when the business was initially set up can be increased through smart growth and profitability, which results in partners putting extra capital into the company after its founding. The key point here is the need for profits and the management of smart growth. In other words, the partners anticipate a brighter tomorrow for the sector and, as a result, the business. This is why they will gladly place their own capital on the line… Businesses can also be financed through external capital. These types of capital (loans) can be short or long term. - Short-term loans must be used to finance the company’s circulating capital. The most frequently encountered type of loans, short-term loans are smart options offered by the market. In other words, it is a borrowing opportunity offered to a business as it is conducting commerce. The maturity of the loan should be between one and three-four months. Although loans with terms of up to one year can also be considered short-term loans, my opinion is that every term exceeding 120 days is long term. - Long-term loans are those obtained by businesses from banks and other suitable channels with a minimum term of one year and often three to five or even more years. Even if these types of loans come with favourable terms, it is better for them to be taken out by executives who have a clear view of the future for both the business and the sector. Fixed assets like machinery, plumbing and buildings can be covered with these types of loans. - Self-financing: When businesses are able to finance themselves with revenue and net profits obtained via smart production, sales and investments. This type of financing is closely related to the concept of profitability, which is at the core of operations for any business. What is expected and desired is for businesses to finance their growth through this type of financing. After all, you can’t rely on outside help as a sustainable way to do your job.

Why Do Businesses Experience Issues With Financing And How Can They Eliminate This Issue?

Businesses that ignore the basic and universal truths I mentioned in Section 1 experience issues with financing. Of course what I mean by businesses is the owners and executives who manage or sometimes cannot manage these businesses. Businesses that cannot record profit, or high-risk businesses that see their revenue continue to rise as their profits decrease, are candidates for financing issues. The motivating growth of revenue or sales is the easiest type of growth to see and is comparatively easy to calculate. As an economic fact, profits may decrease while revenues increase. If the competition is fierce, this problem will rear its head and quickly grow. Profitable growth is something that must be monitored. In order to do that, the business must be equipped with the necessary platform of a suitable ERP System. A properly established ERP System allows companies to monitor their status almost instantly. By doing so, businesses can avoid missing out on developments and avoid reaching the breaking point because they grew too fast. There is an even more difficult aspect to this: Many entrepreneurs, especially in our country, may see their decreasing profits due to the narrowing in the sector, yet they may still allow for their businesses to go bankrupt. They do not quit and cut their losses when it is still early due to excuses like the business being left to them from their family or simply being used to the work. There are two ways that businesses can meet the need for additional loans due to extended maturity periods and increasingly difficult collections. The first and preferred method is to also extend the maturity periods of purchases (procuring goods) and to share the risk of a loan with supplier business partners. This is generally very difficult and even impossible with products that are imported. On the domestic side, there is no doubt that those who consider extending their maturity period will be your suppliers who are at risk of being weaker in terms of quality. The second method is to apply to banks and credit institutions, which is almost like directly taking on the burden of the loan. This will mean foregoing profits to cover interest, which is another factor that will decrease profitability. On the other hand, banks are generally there when things go well, and when there is a downturn in the market, they tend to lower maturity periods, increase interest rates or even call back loans.

A nice article I recently read caused me to re-evaluate in detail an issue I’ve touched upon in my seminars and articles for years. This article will deal with the subject of extended maturity periods, increasingly difficult collections and the resulting difficulty in obtaining financing from different points of view.

Here are the steps that need to be taken in order to approach this issue professionally:

A) Inform and educate your customers. Teach them the necessity and methods of effective collections so they can use them with their customers. Look into the maturity periods and conditions of their customers’ products; use this information to make a serious argument and get your customer to do the same.

B) Use a significant portion of the time you devote to introducing new and different products to your customers and convincing them to make a purchase to negotiate maturity periods. Learning the techniques and psychology of winning negotiations will always work to your advantage.

C) Just as it shouldn’t affect you if someone else throws himself off a cliff, the long maturity periods of your competitor shouldn’t be of interest to you. The person who provided those terms will either go bankrupt or lose profits eventually, based on his level of capital.

Remember that your purpose is to get the money for the sold product back to the business as soon as possible. Choose not to make a sale if necessary. Hit the brakes on revenue but avoid the erosion of profits due to extended maturity periods.

D) Constantly monitor and analyse the sector. Do not forget that competitors who do not make forecasts and customers who only think of themselves without valuing the supplier disrupt the sector. If you cannot take professional, information-based precautions, change sectors while you still can. Do not forget that those who try to continue their work in narrowing markets or increasingly difficult sectors can meet with even greater losses. Commerce is done to earn profits. Profits are the right and only way to achieve quality, R&D and growth. Extending maturity periods will mean eliminating profits and being deprived of the improvements I mentioned above.

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