How We Should Acquire the Cash Necessary to Continue Operations

As you are well aware, our present level of cash flow will only sustain the company’s expected total expenses for the next six months. Since our new product line is not expected to yield any revenue for the next two years, it is necessary that we obtain outside financing to continue operations and fund the production and launch of our new product. It is crucial that a decision on obtaining financing be made immediately, as any delay would not only risk making the obtaining of the needed capital more expensive but also will risk the long term viability of the company.

Cutting back our operations until the launch of our new product is not a viable solution. Choosing this path would reduce our company’s public presence and market saturation. Keeping some of our products that are not presently yielding a profit on the market helps keep our customers loyal to our brand, making them more likely to purchase our new product when it is released. Cutting back operations will also place additional expenses on the company and inflict a financial burden on the employees that we would lay off or reduce the hours of. The laying off of employees will force us to spend additional money retraining employees that we had laid off as their skills would no longer be fresh. Many of the employees that we would lay off may also find different jobs while they are unemployed, in which case we would need to hire new employees and spend even more money on an employee training program.

While there are several options available to us to obtain the cash we need, the issuance of bonds is the best option. By issuing bonds rather than common stock, we do not relinquish control over that company and a portion of the future profits from our new product line. As our new product line is expected to be very profitable, a bond issuance will assure us of a much higher return, as we would only have to repay the set amount of the interest and face value of the bond. Issuing bonds would also provide more predictability than the issuance of common stock, as the terms of the bond specifically state when the bondholder can cash in the bond, which will make planning for our financial obligations easier. There is also a tax benefit to issuing bonds as opposed to common stock, as the interest paid on bonds can be written off (McQuaig & Bile, 2007). Although the immediate cost of issuing bonds may be higher than common stock, the long term gains from issuing bonds rather than common stock are substantial. With a promising future just on the horizon, now is not the time to be shortsighted.

Issuing bonds is also preferable to obtaining a bank loan, as we should be able to issue bonds at a significantly lower interest rate than we could be expected to obtain a bank loan at. Bonds would provide a greater level of security as well since they would be issued at a fixed coupon rate, whereas a bank loan’s interest rate would likely vary with the market (Bird & Vaillancourt, 2006). As interest rates are likely to rise shortly, the benefits of a fixed interest rate are something that should be taken into account. Issuing bonds would also afford us a greater degree of freedom and flexibility, as bonds would not carry with them the same restrictive conditions that a bank loan would likely come with. This would help assure that we are free to operate as we see fit and utilize all options at our disposal to ensure that the roll-out of our product goes smoothly.

To fail to take the proper steps to ensure the ability to successfully launch our new product line would be failing to uphold our mandate to be good stewards of the Lord’s money. By taking a cautious approach and avoiding taking on the debt financing necessary to launch our new product line, we would be being like the slothful servant who hid his talent rather than investing it in the manner that would be most profitable (Matthew 25:14-30, 1973). Squandering our interest in the company by issuing common stock instead of bonds, because we lacked faith in the success of our new product, would be squandering our talents in a manner that would be just about as bad since we would have known of the better option yet acted unwisely due to a lack of faith. When one has addressed the pertinent issues from all different angles, it is clear that issuing bonds is the only option worth considering.

References

Bird, R. M., & Vaillancourt, F. (2006). Budgeting, financial management, and financial markets in an intergovernmental context. In Perspectives on fiscal federalism (pp. 46-47). Washington, D.C.: World Bank Publications.

(1973). Matthew 25:14-30. In Holy Bible. New international version. Colorado Springs: Biblica, Inc.

McQuaig, D., & Bile, P. (2007). Corporate bonds. In College accounting, chapters 1-26 (p. 822). Stamford: Cengage Learning.