Analysis of Sources of Finance for Investment
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Published: Tue, 13 Mar 2018
Finance is important for economic growth, the aim of this study is discuss how the source of finance is affected to the business for a short term and long term investment, the concept of the investment for the different business is over the globalization, as we know that finance is life blood of business. In modern business which requires huge capital, as well as Funds required for a business may be classified as long term and short term. We learnt about short term finance, Finance is required for a long period also. It is required for purchasing fixed assets like land and building, machinery etc. Even a portion of working capital, which is required to meet day to day expenses, is of a permanent nature. To finance it we require long term capital. The amount of long term capital depends upon the scale of business and nature of business.
To complete my the objectives and the questions, I give the answer of each question in the literature review and objective are the data in the data analysis, the research evaluates the literature on the relevant to service and finance service and the report result from the empirical study in the different company relationship based on the qualitative data analysis and the 5 depth interviews,
Here the topic 1 need chosen is the critical analysis at source at finances for the small and big Business, over the global the source at finance for the operation at the business is two types.
Why I choose this topic?
Retiling is the highly dynamic and more responsive business sector in which we have to integration about the current situation of the market as well as the new exiting technology in our field and area we have to take this think positively and applied it to the business for the future plan and take the consideration of the internal and the external source impact on the future on this technology
Business does not exist in the vacuum, not only it shaped by what is ongoing in the real world at business and management. It is shaped by many of intellectual tradition that shapes the social science at large (global business 3rd edition).
Business types: (Economics influence at accounting practices)
Accounting provides financial
Information about business enterprise to various interested parties. But it is differ from one another. The two aspects have significant impact on the business.
Business Type: business attached by mainly two factors
Class of activity in which business is involved.
Some business buy the goods and sells and other have to make them built them grow and abstract them from earth before them sold
Type of ownership
Some business are owned by one person other by few people operating for further in same way and user need classify into two broad category
Michael r czinlota, ilkka a ronkaineh, ilkka h motett, eugen o moyinhun (Global business 3rdEdition).
External: some people invest the money into business and do not take part in its day to day management.
Internal: Internal User manages the business required detail accounting information for decision making and day by day operation.
Choosing the right sources of the business and start up whenever the firm may wish to grow investment may be needed.
To run the business finances has a cost either financial or independent or both.
It required long-term and short term source
Internal source of finance
It is coming from the trading of business sector
Day to day expenditure in cash to customer for selling product or money covered from the customer credit.
Waste of any surplus assets, (e.g. selling a company car or machinery)
External source finance
It comes from the in dividable business or organization who do not trade directly business (e.g. bank, invertors, government)
What is the difference between short term and long term business?
Short term business
long term business
It needs to cover day by day.
2) Running business expenditure,
Is paid back in the short term
3) So it is less risky
1) it needs for the long term and large investment in the business.
2) paid in the long term.
3) it is more risky
Aims and objective
My research objectives are as,
1) To find out the suitable sources of finance for different business
2) To identify the most effective source of finance for all business sector
3) To find out what extend business unit can minimise cost of capital by
Using effective source
4) To develop source of finance on the base of time period (term-short or
Criteria for choosing right source of finance
For start business think about the amount the money required depends on the type of business
How quality get this money for run the business Find out the chipset option to get more profit and less loss.
Also think about the risk before the start the business.http://publish.ucc.ie/boolean/2010/00/Power/33/33-Power-2010-00-en/media/image1.png
Internal source of finance
The Internal sources made for the organization and they give long term future investment to help in the on hand available money.
Internal sources are sometime offer to organization to preferable as they will cheaper and may be easier to manage. However, the potential for arranging large amounts of finance may be low.
Profit – the company of course has to be profitable for this to be a source, and it must be available in cash. Often this is not viable as they may have paid the profit in dividend to the shareholders, or may be the money is secured for the future investment in the project.
Reduce working capital – the organization is able to increases their some money for investment if they can decreases their stock level or perhaps better their future control and make that they collect reaming debts from the debtor more sharply and late payment to creditors for as long as possible.
Sale of assets – these will depend on the sell value of the assets and the organization may be eighter able to sold this surplus or assets or may be sell the exiting assets by the special leasing company and the stock level maintain company these will give some amount of money from the invested capital and reduce some amount of burden.
Loans –this is start when the bank comes and wants to pay to customer on some amount of interest this is where the banks start to come to give the loan for the short term and long term .
Overdrafts – these will the short term avaibility where you can spend money, for the short term period to and given a limit, as you want. The bank will charge on the overdraft on interest. The overdrafts are given by the bank its depends on the credit score of the customer.
Long-term loans –long term loan are usually given for minimum five years the bank are agreed with you as per given the loan per minimum agreement the bank some money as per the long term agreement with some amount of interest it has more price then the overdraft long term as well, as the bank wants some guarantor for the long term loan because in case of fraud plan for the loan this is a security with the bank that if the lease customer is gone than the guarantor has to be responsible for the remaining amount of money for the business.
Debentures – debenture is a special part form of loan. It is a one type of loan of people to the organization that had to paid at some fixed date the difference between Between the date when the debenture is issued and the valid maturity date of the debentures may be give some amount of interest, this is a small type of business that can grow the more money at a low risk.
Shareholders –the limited company are issued the share and this share can be issued at the certain level of price and it is depends on the profit of the company and the ongoing market value of the company as well as how the public get more share and take their share compare to other company it is depends on the company market value as well as the company prospectus.
Factoring debts – the organization may be wants to sold their debts to the special debt factoring team this means that the company sell their debts to debts factoring company and they are given some proportion of money immediately, and in this way it is the small business to grow up the money more for the debts factoring company and the debt factoring company makes their money when the due dates are coming as per the given time to the (source: http://www.bized.co.uk)
Advantage of source of finance external source.
Flexible: means that this is a long term source so it can cover the payment by the flexibility monthly interval.
Quick –overdrafts are quick easy and easy to manage and the cash flow of money is also easy to land to customer. (Source: http://www.bizhelp24.com)
To the shareholders:
1. When the profit is more than company pay the good money the the
Customer at higher rates
2. The value of the money of share is going up and up if the stock market
. Increases in terms of profit
3. Share can be easily sold in the market.
To the Management:
1. a company can rise their money by fixed rate of money by inverses their
2. The capital increase by issuing the equity share and it is not paid back
During the lifetime of company and the company will round up.
3. The company has no liability to recover the payment of the issue the
Dividend, they are giving if they are making big profit.
4 if the company can issue more dividend share they have more confident on
Among their creditor and investor.
Disadvantage of external source
Cost –overdrafts are contains the fee as well as they are more expensive than the long term source of finance and some time customer have to pay the extra over charge if they are cross the time period limit.
Recall – if you are fail to show the overdraft return then and then the bank may be recall anytime take the reaming amount of money with overpayment.
Security –overdrafts have no security for long term source of finance
1. Some time payment about equity share –holder got dividend only when
The company get more profit and the Bod declared dividend 36 and if the
Share holders, equity share-holder got dividend after they got the
Means that the speculation is higher if the company make more profit to
Cover their equity share preference.
3. Danger of over–capitalization:
In case of sometime miscalculation of the long term finance it may be get
Leads to overpayment as well as for that they have to issue more equity
Share and that’s why the capitalization is danger to cover the long term
4. Ownership in name only:
Holding equity company share are on their names only of the company
And then they have to make a beed under their name for the share holder
This decision takes by the first line manager in the company y but the last
Decision is taken by the Bod of the directors’.
5. Higher Risk:
The share holder may be passed from the high value of the risk and in case of that they may be faced a high amount of loss that share holder are not able to get the dividend some time in case of winding the company and may be ban on the company at that time it has difficult to recover the share holder money from the company
(SOURCE : www.khup.com)
.Advantage of internal source
1) Personal savings
The amount of money is of owner is not been collateral to lend in the business.
There is no paper work required
The money did not need to payment on time to the owner
The money of the personal saving is interest free so the owner can offer a loan to their respective party and get good money from there.
2) Retained profits
The amount of fund in this is own of the organization so it is need not paid back.
In this source there is no interest payment to be made when they are usage of the profits.
By this profit company have not more profit up and then the account ratio is maintain.
There is no issuing cost for the ordinary share.
3) Working Capital
There is a no any cost involved because it is an internal source of finance
No need of repayments
External profit cannot be making any fluctuation on business decision.
This is not increases the debt capital so the gearing ratio is maintained.
4) Sale of assets
The value of on hand money is raised by business itself and there for need not to paid back
No payment required
The big amount of finance is raised depending upon the fixed assets
It is ideal for the replacement of internal finance source.
Disadvantage of internal source of finance
1) Personal saving
When very large amount of money required it is the not ideal source for finance
It is verbally agreement so on the order of the owner that it demands for the money back in short term of period they have to give back and this may cause the cash flow problem.
2) Retained profits
May be opportunity for costs involved
Retained profit are not for the start of the business or those business who are making loss more for the decision making period.
3) Working capital
The opportunity cost are involved
Not suitable for long term business
It cannot raised the large amount of funds
The total risk of the working capital is undertaken by the organization.
2.1 Source used by the different sector.
2.1.1. Reason for choosing the retelling business sector.
The use of internal and extend source of finance is for the newly enrolled technology in the market as well as we have to take the marketing things in the more volume and supplied to respective place with the client and customer with exiting offers and price sensitivity of the market and high standard of market. As per the consumer choice
Every asepses used the competitive tools as the technology affected as for example , e-business, and online shopping by this we have a great opportunity to develop the business the business at the international standard and take a place in the globalization world.
(Source : http://www.businesslink.gov.uk)
Reason and strategies for Retiling business( correction in heading)
choose a good location: don’t open the business until you could not find the particulars place to kill the substantial sales potential and for that we have to consider the customer choice their taste and their preference along the products in the market with our new existing product in the market.
Choose effective tools : choose effective tools for the retailing business by the personal saving as internal source and make the interior very colorful and professionally prepared.
Advertise: as for the retailing business we know that if the business is small then we have to use the short term loans and if the business is huge than we have to used the long term loan as a external source keep in touch. As we know that to get the more profit from the market it important to notice that how the customer more attract towards the product and for they use the money as a advertise expenses and promote the product by more offer and new skimming and penetration.
Now a day it is easy to get more profit from the retailing business from the world wide as a example for that ASDA, TESCO, SAINSBURY, we have to take a risk for life time if you invest more you can get more profit from the customer.
How will finance for retailing business
For the relating business we can choose short term loans instead of the long term because the long term is more expensive than the short term loans and when the bank is not going to give the loan at that time we can use our personal resources as a personal saving and they can take the money from their friends and relative and home equity loans and cash life insurance.
Some time bank and some of the lenders are ready to give the short term loans if they understand the business plan and your credit history that in the
Past you are not cheating with any bank or any fraud things with any bank.
But at the start up of business you need to put the money is comes from your own personal saving or from the family or friends.
The following options programs are available in retail business
First step is Plan retail business like a program
Then think about the finance and how we do the expansion of this business
After expansion check the flexibility of your business and the product
There are many different type of potential investor in the ,market we have to give surprise them and try maximum to give invest their money in our business by lunching the new promotion offer and taste of the customer as per their choice
At the starting time the retailing business are expensive but well arrange
Business is helping you to achieve the company’s aim and objective.
When we start any retailing business we have to consider the following things in to consideration
Cost: when you start the business the premise you have take is must be affordable as per the business expansion and when you start this business you
Have to think before the add national cost like utility bills leasehold and all the responsibility of the business you think before that you are affordable or not.
Location: before start the business you should check right place for the customer that you want and how you attract the customer also you have to
Check how close this to the park and outside the road and also you have to consideration about how they going to make the impact on the business.
Size: you need to know also how big your business and for that how much you space need and how big display you are need as well as the add space for promotion and extra storage and stockroom area for the expand the upper level. ( Source: http://www.diyfunding.co.uk)
Reason for choosing the manufacturing Unit
Manufacturing unit is very different concept from the retailing business and in the manufacturing unit the huge on hand capital needed to run or setup a new business the amount of risk involved with the manufacturing unit is high compare to retailing business but in this area the chance of return on investment is very higher compare to retailing business because the concept is very wild and broad with the future expectation.
Why Researcher has chosen manufacturing unit?
It is easy to take the huge amount of loan but it is depend on the credit score of your bank history. The aim to choose the manufacturing unit is to make the future bright of the company by the government rules and regulation.
By manufacturing company unit if we get a success than we take over the another company by merger and acquisition by the on hand finance
or by the external source of finance
The amount of the profit and customers satisfaction level is higher
Because we use the in the manufacturing unit they use the updated technology tools and machinery and by that the level of output product is very sharp than the retailing business.
A good innovative technology tool and technology with better production..
New option and market growth for the product by skimming and penetration by price sensitive market.
Starting and operating a manufacturing unit
Now a days in the price sensitive market if your business heavily depend on the price and you are pay the amount to your merchandise or on your ability to provide the quantity at a content level to your customer than your most profitable growth strategy may be set up a new manufacturing unit and produce e this original product at a same level of quantity,
However the expansion for the manufacturing unit is not the same thing as the other business as they taken lightly but the planning is more essential thing for the new manufacturer enterprise, in the starting there are heavy initial investment in the land, building and the machinery equipment with the skilled worker and large expenditure for the new raw material and semi processed material
Types of manufacturing unit
There are different types the manufacturing unit as shown in the figure as per the need of the different product, first they get involved with the raw material and at the last they want the good finished product, first the, low level company make initial product and after the different types of succession of periods the output product is done as shown in the following graph.
There are different types of stage in the product development and on the each stage we have to do some finance for the product development and for the product promotion.
As shown in the graph that at the evaluation stage we have to decide our linit of the investment that how our project big is and how we capable for the finance or not and in the second stage is the development and now a days the technology is drastically change day by day with the new innovative idea so we have to develop the specialized R & D department who invest more and more and get the good product result against their competitor with the price sensitive market. The next stage is introduction stage in this stage the behavior of the customer towards the output product how the customer reply to this new lunching product as per the customer taste and preference and if they not like then they have to change their production level by investing money from the long-term loans and change the machinery or the equipment for the better production for the more profit. Next stage after this is the product growth stage after production of the good product it has to be sale in the market as per the company’s target and for that they have to do the best marketing now a days for example online shopping advertise new promotion offer, like that they have to marketing or by the skimming or penetration they have to enter their product in the market and get the maximum rewards as compare to other competitor in the price sensitive market. The nest stage is the maturity stage in this level the product must have to reach a level at their it gives the maximum rewards as per the target with minimum losses.
Point out Difference between the retailing business and manufacturing unit business.
1 Retailing Business need small
Amount of money so it use the
Small term finance source as a
Personal saving , Retained profit
1 Manufacturing unit is very wide
Range of project so may me need
Huge amount of finance and for
That we can use the long term
2 easy to recover the payment
Without any amount of interest.
2 Difficult to recover the payment
By bank because of high rate of
3 size of the network
A retailing business have number
Of network typically consist of the
Multiple warehouse and a larger
No. of retail are run into thousand
Number of shops.
3 Size of network
A manufacturing on the other hand
Have same thing but it will run the
Business from the one location
4 Type of Network
In the retail business primary they
Need storage location for the good.
they needed the Selling location
4 Type of Network
They need very big location for the
The transferring of goods by
Shipping or air craft in the world
5 capacity planning
As they are retailer they have not
To stock to much they have their
Merchandise or local supplier who
Supply this good for the customer
5 capacity planning
Their manufacturing capability
Like time resources, skill worker
And their capacity planning are
6 collaboration with partners
In the retail business the main
Assets being managed through
The supply chin management
6 collaboration with partners
In the manufacturing there are
Quite few parameter around the
Resources planning that are control
With corporation wall.
Cost of capital
A question from the multinational corporation is whether the rate of return on the projects should be higher or lower or the same as that of the domestic project. We have to must know the issue of the cost of capital on the international business as small or large the most common issue with that type of question is coming at that time we must have to know the knowledge about the foreign investment without this we cannot made decision properly.
Source: Alan c .Shapiro 8th adition 2002 (Multinational financial management).
The cost of capital is defined as for the given investment minimum risk –adjustment return required by the shareholder of the firm by undertaking that investment
The development appropriate cost of capital for measure multinational business firms closely bound to that measure will be used. Because they see using the same discount rate method to aid the global resource –allocation process. And for this there are different types of discount rates methods are as follows.
It is also define by the minimum return on the company should pay on its own investment to earn cash flow out of which investor has been paid for their return.
Cost of capital is the opportunity finance because it gives the minimum rate on the investor required. As per their investment
By formula it is given by
Cost of Capital= risk free return + premium for the business risk + financial risk premium.
Risk free return means that it the returns which is required for an investment if it is free from risk
The business premium risk is need to be increased due to the existence of the uncertainty in the future about firms’ business.
The premium financial risk is very danger and related to the high debt levels and in that there is a chance for the gearing ratio is if high than the capital structure going at the high level and this will affect to the share holders and should be reflected into the higher risk premium of cost of capital.
Cost of capital is two types
Capital needs can be diffenciate into two categories
1) Long term needs
2) Short term needs
Long term needs are offer more then 0ne year and the short tern capital loan finance are offer to the party if the capital budget is less than one year.
1) Short term capital financing
Short term financing is the most common asset that should be very common assets for the accounts that it will be quickly receivable with their inventory, seasonal business must be in the build like that the selling requirement of the target and it should be not receivable until the selling season, the supplier wants sometime short time inventories to continue their business with the wholesaler and manufacturer. With the major portion tied up in inventory. and payment with the customer.
2) Long term capital finance
Long term finance is associated with the fixed assets like property plant machinery were they are used for the many long years and in most situation it will be used for the financing recover .
Internal capital financing source
This are generated within the business and external source are those who are generated outside the business
For example they can generate the business internally by collection of receivable money and surplus inventories as well as the retaining profit in the business for cost cutting.
And capital may be generated externally by generated the money borrowing from the different investor who are interested to by the business.
Internal financing source
is done to meet the initially designed capital if this efforts
is fail to generate the require capital than it can reduce drastically the external financing need like lower interest rate payment, lower expenses , cutting the external cost lower repayment obligation than we can improve the further financing to generate the maximum capital and increase the
Confident of the employee with the business and management and the business and lender and inventor are more willing to happy for the investment to decided their commitment
External financing source
External source of capital is done through the investor lendor and other business partner for the future investment and get the more profit from the business the external business involved very high amount of risk than the internal source and
Various source of finance for the cost of capital
1 equity share capital.
2 preferences share capital
3 Debt (non callable and convertible shares)
The cost of capital is different from the tax and inflation for the investor and the Landor who want to put the money the money into the business
The cost of capital is build by the following cost
1 cost of the debentures
2 cost of the preference share
3 cost of equity
4 Cost of term loan
5 cost of retained earnings
Firm’s cost of capital & project
A firms represented the new investment of project and for that they have have to invest their own individual money from the project called the cost of capital For the investment in the new project the following condition shold be satisfied
1) The risk involved with the new investment in the project is the same
Amount of risk as the new existing investment
2 and when the firm start at the begging time they designed they well
Organized well desired structure by the well skilled panel of member
And on this firm the upcoming new investment cannot be affected.
The cost of capital is depend on the rate of return how much the return company had made after the profit to
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