Managing Finance Resource

Managing Finance Resource Management

1. Understanding sources of Finance available to business

1.1 Sources of finance

Sources of finance have been classified into two types which are internal and external sources of finance. Internal sources of finance termed as self-financing sources which come from business such as Personal sources, Retained profits, Sale of Fixed Assets. External sources of finance are those that are raised outside the company such as Bank Loan or Overdraft (shot or long term), Additional Partners, Issuance of Shares and Bonds, Leasing, Hire Purchase, Mortgage, Trade Credit and Government Grants (Fitzgerald, 2012).

1.2 Implication of these sources of finance

Implications of these sources of finance are as followed:

Internal sources of finance implication would be benefiting with non-distribution of profit. When fund coming from company, then entire profit is with company along with freedom of decision making and has more flexibility when certain project face slow revenue generation. The implication of external finance is that company would be experiencing a faster growth since no company has so much capability of financing entire project. Beside this, external source would be offering Greater Economies of Scale in order to compete in the market. Moreover, this finance offers higher return rate i.e. ROE as interest is not tax deductible (Barrow, 2012).

1.3 Appropriateness of Sources of Finance

Appropriateness of sources of finance depends on the nature of the projects. But the most suitable sources of finance are issuance of shares, bank loan and bond issuance.

Issuance of shares: There are certain benefits due to which these options are attractive to the company which are potential to raise large sums of money no obligation to pay dividends. There are few drawbacks that are loss of control over the company; Dividends are not part of tax and distribution f profit.

Bank Loan: Benefits of loan are convenience and accessible, lower interest rate depending on the duration, non-sharing of profit and tax advantages. Draws are Lengthy and time consuming, Risk of losing Collateral, cost is high.

Bond Issuance: Benefits are that bond does not need any collateral, Attractive large funding, Tax advantage, creation of credit history. Drawbacks are legal obligation of paying return, same maturity; yearly expense reduces company net income in the income statement (Fitzgerald, 2012).

2. Understanding the implication of sources of finance

2.1 Cost of different Sources of Finance

The following are the cost for different sources of finance:

Cost of Bond: Interest Payment i.e. coupon payment

Cost of Loan: Interest payment

Leasing: Rent payments on monthly basis

Cost of Shares: Dividend (if profit left after paying all expenses)

Hire purchase cost: Hire Instalments

Venture capitalistic Cost: Certain revenue percentage.

2.2 Importance of Financial Planning

Financial planning is concrete and regimented procedures that permit business for formulating a framework, in order to manage company finances and control over the spending. Proper financial plan allows company to make appropriate financial decision and to keep track on market trend. Financial plan offers various benefits with respect of cash management, long range view of expense and revenues, spotting trends and Prioritizing Expenditures and the most ...