FINANCIAL ANALYSIS

Finance and Sources of Finance

Finance and Sources of Finance

Introduction

In an economy, commercial entities play a very critical role in the development of society and social welfare. All organizations are working day in and day out in order to achieve their specific goals. The nature of all businesses is different from one another, but one thing is common in all of them, and that is requirement of finance. The required money, to manage an organization is called capital, and the cost incurred to acquire such capital is termed as cost of capital. In this assignment, I am going to elaborate why there is a need of finance, how companies acquire finance from various sources and what are the implications associated with the different kind of financing sources. Furthermore, I will also discuss the rationale behind the cost associated with the capital, why financial planning is important for the success of a business, how different sources of finance affect the financial statement of a company.

Section 1

When a business involves in expansion or wants to grow it requires a substantial amount of capital to fulfil its desired objectives. Most of the companies do not possess surplus amount of cash or financial resources to invest in their projects. Acquiring the desired level of financing is one of the most significant and important issue facing a business, weather it is in its initial phases or well established. Companies require finance for investing in land, equipment, new markets, and inventory or for hiring new employees.

Sources of Financing available to a Business

Funds or finance usually transfers from Deficit spending units of an economy to the surplus spending units. A business can borrow required money from different sources of finance available in the economy (Eddie McLane 2006, p.212). Sources from which a company can borrow the required finance are classified into two broad categories internal financing and external financing. Details about each source of financing is given below.

Internal Financing

Internal financing means usage of financing sources which are available within the company. Such kind of financing is most preferable because it does not expose companies to the external environment. Internal financing help companies in developing their own capabilities to generate enough amount of finance to support their operations. Internal financing can take place in many forms such as

Profits

Profit is considered as the most renowned and credible source of internal financing by financial managers. When a company earn a substantial amount of profits, its owners or shareholders have two options. First they can get their profit part out of the business or secondly they can keep their money within the business. Company's capital reduces if the owner selects to take their profit part out of business. However, capital can be increased if the owner selects to keep the profit within the company, and financial managers can utilize this capital into a different kind of projects. This retained profit also Support Company in inflationary times.

Customer

Businesses can raise finance internally from their ...