Small Bakery Short-term Solvency Oriented Financing Path Exploration

Short-term solvency is whether a small and medium-sized enterprise can repay its short-term debts in the near future; it is one of the key indicators of life. In the context of the fast-paced consumer goods market, small bakeries that need to operate in such an environment are prone to sudden liquidity problems; thus, they need to maintain sufficient short-term solvency ^[4]. The above-mentioned businesses have a steady outflow of cash for raw materials that need to be consumed quickly, daily wages and other operating costs, and the inflow of cash is also dependent on changes in the number of people purchasing goods. The shortage of short-term solvency will break the basic operating circulation and possibly cause the cessation of the supply chain, reduce production capacity, and eventually bring about forced closure. Therefore, to find financing routes suitable for the shortage of short-term solvency, it is necessary to take some practical measures to ensure that the company can maintain normal business operations.

The fundamental reason for short-term solvency management is to coordinate the time of cash conversion cycle reasonably with financing. There is no time gap between current assets (such as stock and receivables) and current liabilities at small bakeries, and the two must be converted into cash for the same time period. If the company's organic cash flow is insufficient, it will need to use external financing. To obtain such financing, first calculate the amount of working capital shortage with a detailed cash flow forecast, then choose from various funding instruments in terms of cost and maturity, and finally select the financing method that can meet the company's short-term demand for capital without causing a maturity mismatch.

Practically speaking, this kind of exploration is of great use to the management of small bakeries. Standardizing the means of short-term financing is to improve the terms of supplier credit, use flexible working capital loans based on inventory, or take advantage of factoring of receivables to turn passive financial difficulties into active liquidity management for bakery owners. The above paper studies several typical financing paths and has developed a system to link capital raising to the need for short-term solvency to safeguard the smooth operation of the company and avoid risks to the entire system ^[1].

This part will set up an analysis system appropriate for the small bakery operation environment and then define the three core concepts. A small bakery, as defined narrowly, is one that is family-run or a small chain bakery with less than 10 full-time employees, an annual operating income of less than 500,000 US dollars, and no public equity. It is to distinguish the special financial problems of small-scale food and beverage enterprises from those of general small businesses. Secondly, the short-term solvency of this group is that it can meet all maturing financial obligations in the next 12 months by utilising relatively liquid assets and predictable near-term operating revenue. Rather than a general solvency index for large enterprises that uses a wide range of assets, this definition is based on the bakery's immediate cash generation. Third, to achieve the short-term financing goal of solvency, choose non-equity financing means that have a repayment period of no more than 18 months and will not affect the daily operation and inventory of the bakery.

The three theoretical bases are given to support the above definitions. The cash conversion cycle theory, adjusted to the characteristics of perishable food retail, provides the basis for the operation of the solvency assessment. Inventory in this sector has been drastically reduced due to the high risk of perishability, so solvency now depends on fast-moving inventory rather than the size of assets; thus, working capital financing needs have been proposed. The information asymmetry theory for small unlisted food service businesses explains the structural financing problems of such bakeries. Since the creditworthiness of the lender cannot be verified through public disclosures, transparency needs to be increased, and financing needs to be obtained through other means to show that the bakery is operating normally. Finally, the small business credit scoring system that focuses on daily operating data and does not use fixed asset as collateral is in line with the characteristics of a small bakery. The micro-bakery does not have many fixed assets; thus, this framework can use real-time point-of-sale and transaction data for short-term credit support. Collectively, these theories can act as the essential analysis support for evaluating the short-term solvency of small bakeries and designing related short-term non-disruptive financing paths.

Small bakeries are not only unable to obtain external funds in a timely manner, but also face difficulties in the short term for meeting their daily operating expenses. The first financing bottleneck is the shortage of collateral. Traditional commercial banks usually need good fixed assets, mainly real estate, to secure loans. However, running bakeries is usually based on rented premises, and there are only some special and relatively low-value facilities. In addition, their financial statements are not regular. Relying on informal paper-based or basic spreadsheet records cannot meet the strict formal audit requirements of traditional financial institutions, thus they are not eligible for unsecured credit products. In addition, the small amount of loans requested by small bakeries is relatively small and not worth the effort for lenders; the internal administrative costs of due diligence will exceed the possible interest income, so institutions are reluctant to provide targeted products. Due to structural problems and lack of financial knowledge among bakery operators, they are unable to find good low-cost and short-term financing channels.

Financing constraints will have a direct negative impact on the short-term solvency of the enterprise and threaten its normal operation. If a bakery cannot get working capital to buy large quantities of flour, butter and other raw materials, it will be difficult to meet the daily needs of production; therefore, the cost structure will be high and profits will be low. During the peak season of sales around the holidays, there may not be enough short-term funds to pay for part-time help temporarily, and thus cannot meet the temporary cash needs of the business. In addition, an unexpected expense for repairing a necessary oven or refrigerator will pose an existential threat; without financial support, even small problems with machinery can disrupt production and cause a crisis in operating capital.

The results from the first 30 small bakery operators in the descriptive survey also reveal that such problems exist in various regions. Over 80% of the people surveyed faced problems such as collateral rejection, and 75% indicated that poor financial records were the main reason for loan rejection. 67% of the respondents could not obtain bulk purchasing discounts due to cash shortages, and 60% of the small and medium-sized enterprises were affected by unexpected equipment repairs and other problems; thus, they are facing financing difficulties and solvency risks.

The operating cash flow mortgage financing for pre-ordered seasonal goods is a special kind of financing that targets the 2-3 month period before the arrival of the Spring Festival, Christmas, National Day, Mid-Autumn Festival, and other holidays. During that time, small bakeries usually receive many paid pre-orders for custom cakes, festival-themed pastries, large group banquets, etc. To meet this demand, more raw materials and temporary workers will be needed, and production capacity will have to be expanded temporarily. The financing path can solve the problem of a shortage of funds now by using the money that will be earned later rather than based on traditional fixed-asset collateral.

A Verified pre-order contract that has been paid a non-refundable advance payment of at least 30% is used in place of a traditional physical guarantee. To make sure the margin is adequate, the maximum amount of the loan is 60% of the total confirmed pre-order revenue. This limit can prevent over-leverage and meet the increasing operating costs of seasonal production. As for the repayment schedule, according to the rules, when the customer has paid 70% of the pre-order balance after the goods are delivered, the system will automatically deduct money from the designated collection account of the bakery. The loan must be repaid within the specified period of 30 days after the end of the targeted seasonal peak; otherwise, it will be a short-term loan and fit in with the bakery's cash conversion cycle.

The basic reason for the existence of the path is to protect the source of repayment. Therefore, there will be no problems in the collection of funds after the loan is issued since the revenue from advance orders has been contracted and cannot be altered. In addition, the restricted use of loans is to ensure that the funds are used for specific seasonal production expenses and will not be diverted to other non-operating expenses, so as not to reduce the liquidity of the bakery. Therefore, the connection among the financing trigger, the use of funds, and the source of repayment can be connected organically to form a self-liquidation financing model that can improve the short-term solvency of small bakeries when they are busy.

In light of the inadequate pre-order revenue of small bakeries to apply for a separate cash flow mortgage loan, the problem is proposed to solve through joint credit guarantee financing among small food industry clusters in the area. Based on the mutual trust and the general operating environment of a cluster, the above types of enterprises can work together to reduce financing difficulties for small and medium-sized enterprises in the cluster. The fundamental idea is that collective credit will be used to replace the original form of an individual's asset-based guarantee to obtain short-term financing.

The work process is regulated by rules. First, five to eight qualified small food business operators in the same cluster voluntarily form a mutual credit group. Second, every member must disclose the operating revenue records of the last six months to the other members to fully share the information internally. Third, all members jointly agree to assume a small proportion of the repayment responsibility in case a single member has a temporary shortage of funds and cannot repay their micro loan. Finally, the local financial institution in collaboration with the cluster will issue the loan without requiring individual members to provide additional personal assets as collateral.

This kind of joint guarantee is an effective way to maintain short-term solvency. It can better solve the problem of information asymmetry between small bakeries and financial institutions; the internal profit distribution of the enterprise will provide verified data for the lender to assess risks in the community. Therefore, the financing threshold for small bakery operators with bad credit is relatively high. In addition, there is a built-in peer monitoring function. Since members have joint and several liability in proportion, they have an interest in monitoring one another's borrowing reasons and operating conditions, which helps prevent excessive and careless borrowing. Through collective restraint and shared responsibility, the joint credit guarantee path can effectively protect the short-term solvency level of all participating small bakery operators.

The third long-term recurring financing path will be used to solve the frequent small capital demands of small bakeries in daily operation. The path will conform to the rule of 15 to 30 days for raw material procurement for most small bakeries. As perishable primary raw materials, fresh cream, fruits and yeast need to be purchased every two weeks or a month, it is often difficult for these enterprises to take advantage of bulk purchase discounts from raw material suppliers due to short-term small funds. For this reason, the micro credit product is set with certain parameters. The maximum single loan amount is set at twice the average monthly procurement cost of raw materials for the bakery, thus keeping the credit line in proportion to the business scale. Submit the recent three months of supplier purchase receipts online; the approval result will be notified within 24 hours. The loan period is strictly 30 days, and the repayment schedule is arranged to be the same date as the bakery receives revenue from its recent walk-in and regular customer sales. The core of short-term solvency management is that cash inflow and outflow must be in harmony. In reality, this microcredit product can prevent the common solvency risk for small bakeries where they have to delay paying their core raw material suppliers, thereby harming long-term cooperation and disrupting the stability of the supply chain. Provide timely funds for procurement to save costs and maintain good relations with suppliers. In addition, the very short repayment term will not leave any unpaid amounts that would affect the liquidity of the enterprise as a whole. By restricting the liability to one procurement cycle and aligning the maturity date with the realised sales revenue, this financing path can be operated in a standardised manner, reducing the intermittent cash flow problem and enhancing the short-term solvency of the bakery.

To check if the proposed financing paths are feasible, take a typical small independent bakery in a medium-sized urban community as an example. There are six full-time employees and an annual operating revenue of approximately 220,000 USD in the bakery. In the past, the bakery has been under short-term financial stress due to insufficient financing channels and has resorted to high-interest informal short-term loans on a regular basis. As a result, the financial position deteriorated; thus, the current ratio was relatively low, the quick ratio was not high, and the cash conversion cycle was long.

Simulation is carried out for the bakery's three most recent capital needs: one is before the wedding season in the local area when many people want to buy custom cakes; the second is for a sudden problem with the freezer; and the third is an opportunity to purchase three months' supply of butter at a 15% discount. Receivables-based financing is used to fund the pre-order peak through confirmed orders. For the repair of the equipment, a small loan line is provided. A joint credit guarantee group is formed to finance the bulk purchase of butter. Compared with the past use of informal loans, after the financing of these two paths, the indicators of solvency show a significant improvement. The current ratio and quick ratio have risen above the ideal levels, and the cash conversion period has been reduced. Quantitative data show that the proposed path can lower the average financing cost of the bakery by more than 60% and reduce the risk of short-term capital default by over 75%, thereby verifying its practicality.

The above paths need to be strictly followed in daily operations. Operators should standardise the submission of pre-order contracts with clear payment terms and signatures to meet the stringent documentary requirements of receivables financing applications. A joint credit guarantee group needs to select a partner with complementary cash flow cycles to reduce the risk of collective default. Although micro-credit products are accessible, operators must still avoid excessive borrowing. The upper limit for borrowing should correspond to particular, identifiable sources of income to guarantee that all financing operations will be conducive to short-term solvency of the bakery and will not create new financial risks.

To find the financing way for small bakeries that can help them get by in the short term, this article thinks that the basic reason for good liquidity management is to make the financing structure conform to the operating cash flow cycle. The main purpose of the above is to match the maturity of financing with the life of the underlying assets and avoid short-term liabilities leading to business failure or selling assets at a loss. For small bakeries, in general, since the inventory turnover is relatively high and the amount of accounts receivable is low, the first step in ensuring short-term solvency is precise cash flow prediction. To find out the scale and time of the working capital shortage, one must map out the daily sales inflows and outflows of perishable raw materials and labour. Once these shortages have been determined, choose suitable financing tools. Flour and ingredient suppliers can offer trade credit or a revolving line of credit; these are the most practical forms of short-term financing because they have a short time to maturity and can be used to cover temporary cash shortages. Based on point-of-sale transaction data, revenue-based financing is dynamic; that is, it will change with the sales volume and not experience a sudden decline in payments due to seasonal downturns. The above is of great practical value. With the above ways of arranging money systematically, small bakeries can make liquidity management a form of proactive operation instead of merely dealing with emergencies. Strengthen the current ratio and quick ratio of the short-term solvency ratios of enterprises under the impact of the macroeconomic environment, maintain the goodwill of suppliers and operate normally ^[3]. In the end, combining accurate liquidity forecasting with suitable short-term financing instruments will provide a stable financial base for small bakeries to cope with the fluctuation of cash flow and thus secure their long-term development in a competitive market ^[6].

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