The Sources Of Finance Available To A Business Finance Essay
The finance is top most requirements to establish a business and maintain it. No business can survive without funds and to have those funds company has to seek for sources of finance. There are several sources of finance in today's business and company has to decide which source is affordable for the company and suitable for their business. Usually organizations don't rely on one financial source but several at once to meet the financial needs. The companies evaluate these different sources of finance to reach to adequate financial decisions. These decisions include pricing, investment and budgeting.
The financial strategies help organizations to develop techniques in order to establish an effective financial performance.
"The importance of finance and its management in a business cannot be over-emphasized. No business venture can exist without funds, I mean adequate funds. After business incorporation, the business starts existing as an artificial person, in other to maintain his existence, Mr. artificial person will use funds to acquire fixed assets, to start his business, to keep it growing , viable and liquid; above all, to help it grow.
This explains the importance and priority of place accorded finance and its management in a business domain as all other business activities( that is production, marketing, man power development, research development to mention but a few) revolve round 'Finance'."
This assignment gives a broad understanding about managing finance in various ways within the business of an organization and compares these ways. How to avail the different financial resources and how information about finance helps and contribute in making decision. It also includes consideration of making judgments about pricing, investment and budgeting. this assignment helps to learn the techniques to evaluate financial performance.
Explore the Sources of Finance available to a business
A business is impossible to grow and expand without funds. These funds also called as finance for the business. Since it's a vital need for every business the money requires for business is finance for the business. Since every business needs finance to run their business it's always a major concern for the authorities and managements to figure out where they can obtain this money from, to promote their businesses. To acquire these funds, a business has to seek financial aid from different alternative it can find; these alternatives are resources of finance. These alternatives or resources invest or lend money to the organization and get a return which can be called interest rate or cost. There are various financial resources and each financial resource has its own features and procedures. The interest rates also vary according to the resources. These resources are not for individual needs or ordinary needs but it's available for keen business purposes for example building a cricket stadium, new factory, shopping centre or warehouse.
Sources of finance: -
There are two types of financial resources as below: -
The internal resources are as below: -
Retained profit: -The profit after paying all bills is retained profit. Organisation then invests some of the profit into its financial future activities and strategies. This is the best source an organisation can rely on for long term finance.
Assets Sales: - organization can also sell its property such as land, buildings, logo or equipment etc to acquire money.
Reducing Stocks: -Reducing stocks are sorts of assets within an organisation which can be sold to obtain money. The raw materials, semi-finished products or unsold finished products etc are type of stocks.
The external resources are as below:-
Trade Credit: - it is a very useful resource of financial aid for a business. Its helps the organization to be able to purchase the goods and use them and pay afterward within the period to return given to the organization. Trade credit is one of the prime financial sources for business. For example the organization can return the credit in one month but it won't be only money worth goods but some return on them too which is, as we have mentioned above, interest rate. But the period to return the credit with interest can be 3 months, 6 months or even one year as well and the interest rate varies according to the period of return. Usually only huge organization has privilege to return money back.
Bank overdraft: - this overdraft resource can be used in business when an organization doesn't have any money in the bank but bills are due to be paid and the money from the customer is expected in certain period or already due. Bank still pays for these bills as it knows the money from the customer is due on certain date and the money bank pays is also knows overdraft. for example £3000 are due from the customer on 5 January but bill is due to be paid on 1st of January, bank still pays this bill of on the behalf of the organization since it knows the money is due from the customer of the organization.
Credit Cards: - this according to this credit card system organization get these credit cards from banks and buy goods and pay bills from this credit card. Then after a month or a decided period bank send a detail to the organization about all the money the organization has borrowed and the money organization suppose to pay to the bank back including interest. Organization has to pay the bill back to the bank; if organization can't pay all the money back then it still has to some of it at this time and the rest of it later. Interest varies according to the period of time the credit has paid back and the amount of credit. This system is very similar to trade credit.
Leasing: - It means lending something to someone just for use on rent, for a certain period. It is similar to a contract between organizations which can also be called lessor who lease the assets or property and the second is lessee who hires the property or assets. These properties or assets can be building, machines, transportation sources or various equipments. The lesser has to pay rent on the basis of month, 3 months or 6 months etc.
Bank Lending: - loan from bank is a very reliable source of business. But usually bank lends money for short period of time. Though now banks have begun loaning money for longer time for example medium term lending quite frequently. The interest rate is very fair in bank landings.
Share capital: - the share capital is good choice for private limited companies and public limited companies. Shareholders buy share of the company and the money company receives from the share holders goes into business straightway in order to promote and expand the business. The rate of share depends on the status of the business in the market. The shareholders are like partner in the business and they share profit with the organization. Private limited companies usually go for only two or three shareholders but in public limited companies anyone can buy share and share the profit of the business.
Venture Capital: - according to this resource company borrow money or hire assets from interested wealthy people and invest that money in the business. This method is getting popular fast in modern business. The investors are also called venture capitalists. The capitalists get the authority to participate in decision making and also share the profit of the business. This is a risky method for investors.
Mortgage: - companies use this method to buy new properties, equipments or assets. Sometimes mortgage is just used as assurance to the bank as a recovery of the loan.
Grant from Government: -this grant from government is most decent way to get money from. The grant from government is usually free or with very little interest. But government only gives this aid to the business which are trying to established or struggling to sustain
Analyze the implication of finance as resource within a business
Cost of trade credit: - A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. Given that the retailer is an important customer, suppliers allow the firm to stretch its credit terms. What is the retailer's effective cost of trade credit?
Cost of Loan: - loan varies allot according to the amount of loan. The interest rate behind a loan is about 1% to 2%. It varies according to the purpose the loan is needed for. For construction the loan is more than 1%, sometimes even more. It varies according the period as well for example the loan is between 2.5 to 3.0 points for 5 to 10 years loan. The cost of loan can be lower if the borrower passes the financial limits test successfully.
Cost of overdraft: - overdraft is quite expensive source to attain money from but it's very reliable as well. The normal current behind an overdraft is about 18%. The most previous interest rates behind overdrafts were around 13% to 25%.
Credit cards: - the rate of the credit card depends on bank's risk management strategies and it depends on borrowers credit records as well. Most credit cards cost 8% to 36% of the credited amount. But secured real estate rates behind credit cards are pretty lower. But the rate loan for real estate is 6% to 12%. credit cards rates are very volatile, they don't only differs according the purpose of the business but geographically as well for example credit cards rates are very high in brazil which are up to 50% and in USA these are 8% to 36%.
Cost of share capital: - shareholders are the one who share the profit of the organisation. They get return of the money they have invested in the business. The company has to produce more profit then the cost of share capital price so they can return the cost to the shareholders.
"Types of cost
Assumptions to measure cost of capital
Business risk will remain same.
Financial risk will remain same.
Specific cost of capital
Cost of debt
Cost of preference capital
Cost of equity capital
Cost of retained earnings
Cost of Debt
Cost of perpetual debt:
Ki= Interest payment
Accessed on 09/05/2010
Cost of mortgage: - this is the method with most variation in interest. It varies according to the period of time the money is lent for.
Rate behind 15 years is 4.250% 4.578% $1,505
Rate behind 20 years is 4.625% 4.916% $1,279
Rate behind 30 years is 4.875% 5.057% $1,058
Venture rates: - the rate of venture capital is very high, up to 20%. The reason of it being so high is the high risk from lender's side.
Free government grants: - usually this grant is for free as it's considered a help or support from the government to those businesses which are struggling or typical businesses which are losing existents. Sometimes grant from government also has rate but this rate is very little. But this method can't be used by well established business or large organisations.
Financial planning: -
Cash Flow: with the financial planning a business can determine exact cash increasing cash flow and measure tax, expenditure and meet a prudent budget.
Capital: -An effective capital in a business can be built and managed with the help of an intelligent budget strategy.
Income: well planned income is very useful in tax and other monthly expenses and saving as well.
Family Security: financial planning provides the several policies which are great help for financial security.
Investment: A prudent planning helps the organization to decide the right investment policy in interest of company and helps to figure out the income and expenses of an individual within the organization.
Standard of Living: savings are a vital tool in critical times for example when family loses life of someone they are dependent on then under good planning these savings plays the role of rescue and help the family to survive in times of crisis.
Financial Understanding: it helps to realize the current financial status of the business in the market. When a business has the financial understanding it's easier to do investment adjustments and develop the retirement policies.
Assets: it's important to realize the actual value of the assets as most of the assets in the business has liabilities along with. With the help of good planning it's easier to choose the correct and required assets so they won't be burden on the organization.
Savings: it is always helpful to have high liquidity savings which might be required and utilized in emergency or other beneficial purposes.
Information needs of different decision makers: -
Identifying the problem: -The major requirement for decision makers is to define the problem and identify it. The information about problem helps the management to determine which issue needs to needs to be covered and which decision should be taken. Mentioned above information about problems is necessary to reach to a better decision
Exploring the sources of information: - this is also important to explore the sources where the information can be acquired from and which information can be taken in consideration. Who possess on that information and why these sources have that information. Compare and explore the sources to find out which sources are carrying most effective knowledge. It's also important for the decision makers to identify the type and format of the information so it can be understand well since different sources contain information in various formats and types. Books, articles, documents and interim information products can help the decision makers to attain the information from. The various states of information decision makers may need are as below: -
Information which the decision makers know they have.
Information they know they don't have
Information they don't know they have
Information they don't know they don't have
Processing the information
The gathered information needs to be processed in which manner is the next step. Which portion of the gathered information can be used and which data and information is required. This is also important to determine which is the best way to use this information in order to understand the problem properly and reach to productive decision.
Decision makers analyze the gathered information to reach to opinions according to effectiveness of the information. And use these opinions to take final decision. But this is also important to make sure that whether the decision of decision makers really is efficient enough to solve the problem and the decision brought the satisfactory results indeed and works in concerned party's favours.
Make financial decisions based on financial information
It helps the organisation to define the objectives in financial terms
An efficient budget is the prime concern of every business as an efficient budget provides strength to all units of a business.
Good budget requires distribution of clear financial liabilities and accountabilities to all departments and units within an organisation and specific planning etc. It provides co-operation and team spirit among the employees as it needs joint operation of all divisions of a business.
It helps the organisation to identify and prevent the losses and then minimize the wastage.
It helps delegated responsibilities control to be smoothers.
It gives the speculations of expenses and minimizes them if possible and helps the organisation to achieve the expenses related results.
The organisations are provided with great wisdom by managers who contribute in budgetary system.
Managers review their previous mistakes and learn with the help of budgetary system
Unit Cost: - unit cost can be the price of a stock of a particular product, a single sample or container of numbers of products etc. It includes fixed costs for example plants, technology and equipments and labour and material cost as well. The total cost goes up when buying more than one unit but the actual single unit cost decreases as the quantity of unit increases.
"Comparing Unit Prices can be a good way of finding which the "best buy" is.
Example: What is best
2 liters of Milk at $3.80, or
1.5 liters of Milk at $2.70 ?
In this case the "Unit" is 1 liter, and the Unit Prices are:
$3.80 / 2 liters = $1.90 per liter
$2.70 / 1.5 liters = $1.80 per liter
So the lowest Unit Price (and the best bargain) is 1.5 liters at $2.70.
Of course it doesn't tell you the quality of what you are buying, but it can help you make a decision.
If something is sold in number of items (for example "10 pencils") then the same method can be used:
Example: What is best
10 pencils for $4.00, or
6 pencils for $2.70?
Here is the Unit Cost:
$4.00 / 10 = $0.40 per pencil
$2.70 / 6 = $0.45 per pencil
So the lowest Unit Price (and the best bargain) is 10 pencils for $4.00"
Accessed on 08/05/2010
it help a lot to the organisations to reach to productive decisions. For example any single product which is less expensive per unit, usually isn't good quality product to buy. An expensive product is not good as well if a person is unable to store it. If you later on find out that this product is no use for you and is thrown away, therefore purchasing big size of material or products isn't a wise choice.
Cost per unit helps you consider and decide what you should buy. The brands which are in store or less famous are usually less expensive then well known products. Store brands and little known brands often cost less than well-known national brands. Sometimes when the price is down but two products look very similar, in such situation you need extra attention for example not only read the price but ingredients and nutrient facts on the label of food's unit. These foods might have difference in its colour, size etc. To buy variety in colour or texture in slices of food, you might have to buy the expensive product; the price sometimes doesn't matter much. But if you just need that food product as simple snacks for the kids, you can buy all the slices with same colour which might help you save some money. So the unit cost put great influence on decision while buying things and also helps you to buy the good thing with decent price, using your wisdom.
Analyze and evaluate the financial performance of a business
Financial statements: - financial statement is form of report carrying financial status of a business. Income statement, cash flow statement and balance statement are also major part of financial statement. Financial statement carries the details which show how the business used the funds and these details are gathered often on quarterly and annual basis only.
It basically has three objectives
Financial position: - every organization's prime concern is to maintain a strong financial position in order to expand their business without a hitch. Healthy financial position facilitates the efforts to develop business and using finance when require. Therefore the financial statements plays a significant role by helping organizations to understand their financial statements and bring up the weaknesses so organizations can improve those weaknesses and expand their business.
Financial performance: -It also helps the organizations to see the financial performance of the organization. If the performance needs to be improved the organization can concentrate on it.
Better financial planning in future: -The accurate financial statements help the business to understand which changes are required and which strategy needs to be replaced by more efficient strategy. With the help of financial statements organizations can study their past experiences and learn how to improve the mistakes they have made in past therefore the organizations can design better strategies for future.
"Summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is its current financial position. The three basic financial statements are the (1) balance sheet, which shows firm's assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm's activities during a stated period."
Presentation formats of Financial Statement for different types of businesses: -
Internally prepared: the companies, those design own annual or interim financial statements, can follow GAAP (Generally Accepted Accounting Principles) rules. GAAP are set of rules and standards placed by governing organisation, CPAs (Certified Public Accountants) and accounting scholars. The member working within the company can prepare the financial statement and may even be CPA. The financial statements are considered with least quality since and can be used in a business with sophisticated accounting professionals and for small businesses.
Compiled: these statements are designed by CPAs with the help of business clients in accordance few GAAP rules but not precisely all. These statements are good for banks and similar trades for example lenders.
Reviewed: - These statements are one step above of compiled statements. According to this statement, a CPA will look more deeply in client's business and make inquiries for financial information and analyze the information. This method is used to check to acquire information whether or not the statement is not modified by any material. Usually lenders prefer review statements then compiled statement.
Audited Statements: these statements are prime statements. Publically held companies rely on these statements with the help of security and exchange commission. These statements are mostly used by big private companies with several shareholders. It helps to increase the value of company if owners want to sell it soon. These statements can also be used by third parties, whom the company is going to be sold to. these statements shouldn't be confusing with the opinions of the ACPs or auditor who prepared these statements.
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