Scott Equipment Paper
Debt financing is a common method for small businesses to raise capital. The following paper will focus on Scott Equipment by formulating an aggressive, moderate, and conservative plan to finance its working capital. The working capital position, current ratio, and expected rate of return on stakeholders equity will all be essential pieces of this analysis. At the conclusion of the paper, Scott Equipment should have a range of viable options to finance its operational goals.
Summary of Short-Term and Long-Term Financing Policy Options
Short-term financing is usually used for a term of six to twelve months. It is typically used to increase the company’s amount of available working capital. This in turn assists the company in having the ability to buy a much needed piece of equipment or to pay utilities and suppliers. In this exercise, we were given the following table of financial information to assist in the determination of the best financing choice.
|Financial Policy |Millions of dollars |
|Current Assets |$30 Million |
|Fixed Assets |$35 Million |
|Expected Sales |$60 Million |
|EBIT |$6 Million |
|Tax Rate |40% |
|S.E. used for financing of |$40 Million |
Aggressive Financial Policy
Aggressive financing policies “...are those policies of investing a company’s assets to gain the highest rate of return on the investment”(Murdock). The two most common advantages to using this option of financing are:
Less chance of incurring bad debts
Money is typically recovered quicker and thus reducing the cash conversion cycle.
There are always disadvantages to any financial option. The two that are prevalent in this financing option are:
First, customers sometimes object to this option ...
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...t Equipment, it may not be the best option for every company. The financial management team needs to determine how much they are willing to pay in one area, such as the interest paid on long-term and short-term debt, in order to have a higher amount of working capital available. As mentioned above, the conservative financial policy can become too cost intensive to use. The moderate policy can provide a happy medium. It is important to remember that when considering one of these plans, is to try and avoid assuming more debt.
References
Gitman, L. J. (2009). Principles of managerial finance(12th ed.). Boston, MA: Pearson Addison
Wesley.
Murdock, Rachel. Aggressive Financial Principles. Retrieved from http://www.ehow.com on
December 14, 2011.
Watson, Denzil and Head, Antony (2007). Corporate Finance: Principles and Practice. England:
Pearson Education.
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