A SIMPLE CALCULATION METHOD FOR DEFINING CREDIT LIMITS OF ENTERPRISES

2003, 4 (3)   p. 273-280

I TÚRÓCZI

Abstract

When setting up and operating a business, one of the most important tasks of the entrepreneur is to secure steady solvency. In order to achieve this and to increase production they often rely on the involvement of external capital. From the point of profitability it is critical to evaluate how these elements of capital will influence expenses and profits. Some of these sources bear no costs making a favourable effect. However, there are other capital sources, which result in a significant increase of expenses. Capital gearing (leverage) also brings costs and expenses, which a business must be able to measure and evaluate. We must know the reasonable options to choose and the limits of expensive capital involvement. As part of my consultany work, I have researched this issue and, relying on business literature, I have designed a calculation method which helps to define this limit. In this paper the reader is presented with this method and is encouraged to comment on its effectiveness.

Keywords

borrowing, leverage, credit costs, financing

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