BUSI 435 Week 7 Discussion Board Forum 4 Thread Example

Discussion Board Forum 4 Thread: Managing Cash Flow and Financing a Small Business

BUSI 435 Small Business Entrepreneurship, Discussion Board Forum 4 Thread

Thread by [Student Name]

The forum prompt and the print shop are composites; the textbook and the research cited are real, and the structure follows Liberty's public course guide for BUSI 435.

Scarborough (2016) warns that many small businesses fail not because they are unprofitable but because they run out of cash. Profit is recorded when a sale is made; cash arrives when the customer pays. A growing business that sells on credit and holds inventory can show a profit while its bank balance shrinks. When that happens, the first instinct is often to borrow. I want to argue that a small business should first look for cash inside its own operations, and borrow only for a specific purpose that the borrowing will pay for.

Research on bootstrapping describes how small firms do this. Ebben and Johnson (2006) studied small businesses' use of bootstrapping methods and found that firms change their methods as they age: younger firms rely more on methods tied to the owner, such as using personal resources and delaying the owner's pay, while older firms make more use of methods tied to customers and operations, such as speeding up collections and managing inventory. The lesson for a new owner is that customer and operational methods are available from the start, and they do not create debt.

Debt still plays a central role. Robb and Robinson (2014) studied a large panel of new firms and found that they relied more heavily on external debt, especially bank loans, and on owners' own money than on outside equity investors. That makes cash management doubly important, because a business that borrows to cover poor collections takes on interest costs to finance its own customers. Every day a customer takes to pay is a day the owner is lending money to that customer, usually at no interest.

Consider a composite print shop doing $40,000 a month in business, mostly for local companies that pay in about 60 days. The owner, short of cash to pay suppliers, planned to open a $50,000 line of credit. Instead, the shop began requiring a 50 percent deposit on orders over $500, invoiced on delivery rather than at month end, and offered a 2 percent discount for payment within ten days. Within three months, the average collection period fell to about 30 days, which freed roughly $40,000 in cash, the value of a month of sales, without borrowing.

Borrowing still has a place. When the print shop later needed a new press that would increase capacity and pay for itself through new work, a term loan made sense because the asset would generate the cash to repay it. The rule is to bootstrap working capital first and borrow for assets or growth with a clear payoff. That is the approach our group's business plan took in pairing a modest microloan with a working capital reserve and payment at the time of service.

The same discipline applies to location and layout, the third topic in this week's chapters. A lease is a long-term commitment of cash, and a business that signs one before it knows where its customers come from may be borrowing, in effect, against a guess. Testing demand first, as the print shop did with its terms, preserves cash for the decisions that matter most.

References

Ebben, J., & Johnson, A. (2006). Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing, 21(6), 851-865. https://doi.org/10.1016/j.jbusvent.2005.06.007

Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153-179. https://doi.org/10.1093/rfs/hhs072

Scarborough, N. M. (2016). Essentials of entrepreneurship and small business management (8th ed.). Pearson.