Question

How do you think a company could balance incurring debt while maintaining sustainability?

Answer 1

Answer:-

The sustainable growth rate (SGR) is the maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt. The SGR involves maximizing sales and revenue growth without increasing financial leverage. Achieving the SGR can help a company prevent being over-leveraged and avoid financial distress.

"Sustainability is equity over time. As a value, it refers to giving equal weight in your decisions to the future as well as the present. You might think of it as extending the Golden Rule through time so that you do unto future generations as you would have them do unto you."

Debt sustainability is one of the most used and abused concepts in recent discussions on preventing and resolving sovereign debt crises. ... A debt sustainability analysis (DSA) assesses how a country's current level of debt and prospective borrowing affect its present and future ability to meet debt service obligations.

To be sustainable, debt interest must be comfortably payable from current income. For a country, therefore, public debt is sustainable indefinitely if the interest rate is equal to or less than the growth rate of nominal gross domestic product (NGDP)

1. Cash flow. Cash flow refers to the amount of money available to the business for paying suppliers and employees and investing in growth.
2. Working capital. Working capital is the company's assets minus its liabilities; also known as leverage.
3. Financiers onside.
4. Employees onside.

There are four factors that indicate a business is sustainable. If these factors are out of balance, then the business should take steps to turn them around.”

1. Cash flow
Cash flow refers to the amount of money available to the business for paying suppliers and employees and investing in growth. If cash flow dries up, the business is unlikely to be able to operate since it can’t access the resources needed.

Andrew Beck said, “Businesses can improve their cash flow by encouraging customers to pay promptly, arranging to pay suppliers slowly, and finding ways to cut costs throughout the business.”

2. Working capital
Working capital is the company’s assets minus its liabilities; also known as leverage. The more assets a company has in relation to its liabilities, the more viable it is.

Andrew Beck said, “Companies with a strong working capital position are able to remain viable because they have the resources they need to continue operating, even in the lean times. They can improve their position by liquidating assets for cash, exchanging short-term debt for long-term debt, issuing stock for cash, and improving their accounts receivable processes.”

3. Financiers onside
When financiers are onside, companies are better-positioned to borrow funds to continue operating. In a tight economic climate, financiers keep a close eye on debtors.

Andrew Beck said, “An early sign that a company may not be sustainable is that its financiers lose confidence in the organization. Keep financiers onside by meeting obligations promptly and getting in touch immediately if you need time to pay. Keeping your debt-to-asset ratio in check also gives financiers confidence in your ability to pay.”

4. Employees onside
For an organization to remain sustainable in the long-term it needs employees that are engaged, committed, and reliable. Employees are usually the first to sense if a company is likely to become unviable. At the same time, employees that aren’t committed to the organization can cause its downfall by offering substandard work.

Debt policy & corporate value

The impact of debt financing on total distributable funds influences, in turn, a company’s value. The appendix shows this influence at work. If, for example, a company in the 48% bracket were to substitute $1,000 of debt for $1,000 of equity and if the personal tax rate were 35% on debt income and 10% on equity, the value of the company should increase by .28 times the amount of the debt ($1,000), or $280.