The financial result and the net book be only better

When a leader decides to invest, he must answer this question: "Should I finance investment, i.e. collecting cash for my business, or instead to seek my banker for a loan" Of course, there is no miracle solution valid for all businesses and all types of investment.

What investment

The choice of financing is obviously not the same as the company is investing in a local or a material to renew frequently. What is real, it will be rational to finance a debt over a period of twelve to fifteen years. However, the speed of rotation of equipment may legitimately push the leader to devote a greater share in the cash flow. It must also take into account the foreseeable impact of its investment in the company working capital needs. If it anticipates an increase of its needs, better keep its reserves of cash hot: they will enable it to finance the increase in the amount of its stock and appropriations provided to its customers without expensive short-term funding too heavily. In General, better finance the heavy investments by borrowings and self-financing operation needs. The financial result and the net book be only better.

More specifically, the company must in principle finance assets using the permanent capital which has (capital, reserves, including long and medium term loans). And it should always ensure that its ratio capital permanent/immobilized net values is at least equal to 1. When this ratio is greater than 1, this means that the permanent capital fund at least in part the operational needs. It is less than 1 when part of the assets are funded with short-term liabilities, which is a risk of management to avoid at all costs.

Should we borrow 100

The banker will be reluctant to finance 100 of an investment. The leader must therefore provide for a contribution of at least 25-30. Indeed, the banker of the company will ensure that the total of the loans is in relation to the amount of equity. Must be own funds remain equal to or greater if possible medium and long-term debts. Without forgetting to check that the self-financing capacity of the company (net income allocations to depreciation) will enable it to meet its maturities of borrowings. It is good that borrowing capital repayments do not exceed half of the self-financing capacity.

Leverage loan

Surprising as it may seem, it can be sometimes more interesting to use a loan then the available company of funds to finance its investment. Indeed, the use of external financing can lead to interesting leverage from the point of view of the financial profitability of the company. In other words, the financial return on capital invested in the company can increase if the investments are not self-financed.

However, should not lose sight of the financial health of the company. And the search for a better profitability should not threaten economic profitability. Therefore, verify that the profitability of the investment is much higher than the cost of borrowing! Failing this, the underwriting of the loan risk to pass the result into the red and putting at risk the company. It is also to ensure that the impact of the choice to resort to borrowing rather than self-financing reduce too much result. And finally make sure that the projected self-financing capacity of the company (net income depreciation after investment debt Holdings) will enable it to cope with deadlines in capital of the loan, without creating excessive financial tensions.

What tax impact

Self-financing generates no additional fees of the accounting and tax point of view. The company can therefore only deduct the depreciation of the property acquired on its normal period of use. Conversely, debt financing allows the company to deduct, in addition to depreciation, the accrued interest on the exercise. Thus, this tax deduction to reduce the cost of credit. And more economy of tax on profits generated by the interest deduction is important, plus the actual cost "net tax" of credit is low and the company's interest to borrow. But be careful however to a basic principle: only the interest is deductible. The part of the monthly payments which corresponds to the return of capital is not, this refund does not resulting in a decrease of the net assets of the company.

Moral of the story: rate which can now be obtained from the Bank and leverage financial and tax debt can legitimately get the leader to keep intact the company cash reserves. It will then have a PEAR for thirst which the will be in a position to cope with the unexpected, which is not nothing in the complicated period of turmoil.