The Strategic Role of Debt in Business Growth and Success

2023-05-22 15:00:00
Li Jiaaji
Source
Translated 355
Summary : This topic explores the strategic role of debt in the growth and success of businesses. While consumer debt can be burdensome, corporate debt, when managed appropriately, can have a profound impact on various aspects of business operations. The article highlights four primary uses of corporate debt, including expanding production scale, investing in innovation, marketing to customers, and managing old debts while entering the capital market. It emphasizes the need for careful planning and risk management when utilizing debt, while also encouraging boldness and seizing opportunities in business operations. Understanding the strategic utilization of debt can contribute to the sustainable growth and profitability of businesses.

In life, numerous individuals experience deep regret when confronted with debts from credit cards. This regret frequently stems from the fleeting pleasure of depleting their savings and amassing limitless loans. It epitomizes the concept of "impulse spending being the devil."


Despite the vexation caused by consumer debt, the operational and production aspects of businesses rely on it. For enterprises, judiciously managed debt yields a significant influence on scaling up production, fostering innovation, and driving technological advancements. It's especially helpful when you start an LLC as the debt won't ever put your personal finances under any stress. The subsequent paragraphs outline the four primary functions of debt when a company exercises prudent control over it.

I. Expanding Production Scale

In contrast to service-based companies that complete the business cycle through service provision, production companies rely on the quantity of products manufactured as the foundation for all their production and business activities.


During periods of steady or booming market growth, consumer demand tends to rise. Consequently, the company's revenue increases in direct proportion to the scale of production and the quantity of products, assuming consistent quality.


Consider a straightforward example: A local market requires 10 tons of apples to meet its demand, but local apple suppliers A and B can only provide a combined total of 6 tons. In the absence of external competitors, the more apples the local suppliers produce and sell, the greater their profit.


However, there are instances when the market experiences rapid expansion, resulting in increased demand. Yet, the producers find themselves lacking the necessary funds to invest in production. Must they let go of such a promising opportunity? In such cases, banks or bond investors are often willing to lend capital, with interest to be repaid at a later date. Consequently, producers borrow money to expand their production and capture a larger market share.


Unfortunately, due to economic downturns and the spread of epidemics in recent years, competitors have already seized a significant portion of the market share. Although the market has rebounded following the end of the epidemic, it remains challenging to return to the initial levels of more than a decade ago. Therefore, during the period when demand has not fully recovered, the priority may shift from expanding production scale to improving production quality.

II. Investing in Innovation

Amidst the impact of Covid-19, the consumer market has contracted, dealing significant blows to both the real economy and service-based sectors. Consequently, the pre-pandemic era of "more production, more returns" has vanished.


To thrive in an oversaturated market where supply surpasses demand, companies must timely invest in product innovation. However, many companies already face financial constraints when it comes to innovation, and such endeavors often represent a last-ditch effort to secure the company's future, financed through borrowing.


As early as the 21st century, China introduced policies like "mass entrepreneurship and innovation" and "supply-side structural reform," highlighting the immense development opportunities associated with innovation. For instance, Huawei, facing the rise of U.S.-made chips, independently developed its own Snapdragon chip by borrowing funds. Despite encountering challenges during the U.S.-China trade war due to chip-related issues, Huawei's self-developed chip enabled its survival and competition with domestic counterparts like ZTE and Xiaomi, which lacked independent chip technology.


In addition to enhancing product quality through innovation, investing in the cultural aspects of a product holds significant value. For instance, a bowl of rice noodles may not have much intrinsic value. However, by weaving a story, such as "a woman crossing a bridge to deliver chicken soup to her husband, who ultimately succeeds in the First-Degree Scholar exam" (at least as per the story known to me), the cultural value of the product enhances significantly, consequently allowing for a higher price. Naturally, this aspect delves into marketing, which can be further elaborated in the subsequent section.

III. Marketing to Customers

Customers are the sole source of profit in enterprise production and operations. Therefore, acquiring potential customers and retaining existing ones becomes a crucial challenge that businesses must address, with marketing serving as the remedy for this predicament.


In reality, marketing can be an insatiable beast, making it often imprudent to rely on borrowing for marketing purposes. However, there is good news: the entry barrier for marketing is gradually decreasing, allowing for leverage from marketing to yield profitability.


As previously mentioned, infusing cultural value into a product represents an effective marketing strategy, and one could even argue that it is a profitable approach. The expenditure on hiring writers ("a") pales in comparison to the immeasurable profits generated by attracting customers. This is where the value of marketing lies—utilizing consumer psychology to maximize profits and achieve significant gains through small yet effective techniques.


In addition to traditional cultural marketing, contemporary marketing primarily revolves around internet-based methods. This often entails store owners or self-publishers hired by store owners taking photos and promoting products on platforms such as Xiaohongshu, or creating short videos to showcase and market their stores on TikTok. Such marketing tactics cater to today's youth. Conversely, marketing strategies targeting middle-aged and elderly consumers frequently involve publishing videos on platforms like AAuto Quicker and Pinduoduo, showcasing products through eating and broadcasting formats to stimulate the purchasing desires of this demographic.


Unlike cultural marketing, internet marketing is generally characterized by low costs and high profits. It has a broad reach, encompassing consumers worldwide who can explore and observe stores through the internet. Additionally, internet marketing, through visual mediums like videos and images, tends to be more intuitive and effective in arousing consumer desire compared to traditional cultural marketing, which relies heavily on textual content.

IV. Paying off Debts and Entering the Capital Market

In everyday life, people often mock the temporary reluctance to address symptoms by using the phrase "Rob Peter to pay Paul." However, in business operations, such practices are frequently the norm and serve as crucial factors in a dynamic market economy.


Take banks, for example. They rely on two primary revenue-generating models: lending with interest as profit, and financial investments using depositors' funds, with investment returns as profit. These two approaches function as distinct levers. Cash flow in banks originates from depositors' funds, which are then lent to borrowers or invested in financial markets. In this scenario, the bank assumes the role of debtor to depositors and creditor to lenders. As lenders repay their loans, the debt-creditor relationship with the bank dissolves, enabling the bank to recover both the principal and interest, subsequently allowing for the repayment of depositors' funds. Additionally, banks can utilize depositors' money to invest in the financial market, generating profits that can be used to return deposits with interest.


Similar to financial institutions, companies, as market entities, have the option to borrow funds for their own benefit, choosing to hold shares or bonds of other companies. However, it's crucial to recognize that banks are unique financial institutions with distinct business models, and their approach to debt utilization may not be directly applicable to other types of enterprises. Furthermore, in China, banks often benefit from support within the national financial sector, which significantly reduces the risks associated with debt. If a company with a weak capital foundation attempts a similar strategy, they are likely to incur more losses than gains.

Summary

For a company, carrying debt is akin to dancing with wolves: while it can yield substantial profits in successful ventures, the risk of losing everything looms large in case of failure.


Hence, when taking on debt, it is crucial to meticulously plan the repayment cycle and ensure a steady supply of cash flow. This proactive approach mitigates the detrimental impact of excessive debt on business development. Simultaneously, it is essential to seize opportunities and embrace bold investments. **Fearlessness in business operations remains the sole path to entrepreneurial success.

Write a Comment
Comment will be posted after it is reviewed.