The New CFO Financial Leadership Manual, Second Edition

Chapter 14. Obtaining Debt Financing^[*]

A business of any size is likely to require extra funding at some point during its history that exceeds the amount of cash flow that is generated from ongoing operations. This may be caused by a sudden growth spurt that requires a large amount of working capital, an expansion in capacity that calls for the addition of fixed assets, a sudden downturn in the business that requires extra cash to cover overhead costs, or perhaps a seasonal business that requires extra cash during the off-season. Different types of cash shortages will call for different types of funding, of which this chapter will show that there are many types. In the following sections, we will briefly describe each type of financing and the circumstances under which each one can be used, as well as the management of financing issues and bank relations.

Management of Financing Issues

The procurement of financing should never be conducted in an unanticipated rush, where the CFO is running around town begging for cash to meet its next cash need. A reasonable degree of planning will make it much easier to not only tell when additional cash will be needed, but also how much, and what means can be used to obtain it.

To achieve this level of organization, the first step is to construct a cash forecast, which is covered in detail in Chapter 12, Cash Management. With this information in hand, one can determine the approximate amounts of financing that will be needed, as well as the duration ...