MANAGING FINANCIAL RESOURCES

Managing Financial Resources and Decisions



Task One

L.O 1.1 Identify and explain four sources of finance available to business

BOATLINE business can avail financing through following sources:

Internal source of financing

Internal sources of financing, like cash drawn from a company's operating budget or capital income to fund a project or expansion, may be the simplest form of financing; this allows the company to make decisions quickly while avoiding the wait for financing approval and avoiding the cost of paying interest or dividends (Paul et al, 2009, 14-29). However, this type of financing has important drawbacks that may mean that it is not always the best choice. Internal source of financing further can be divided in following categories.

Personal saving

Working Capital

Retained earnings

Sales of assets

External source of financing

External source of financing is the arrangements of funds outside the company. These sources run the gamut from equity issuance and sales of debt products to government subsidies and financing agreements through private channels (Paul et al, 2009, 14-29). These sources can be further divided in following sub categories.

Debenture

Loans

Bank overdraft

Hire Purchase

Lease

Grants

Venture capital

Invoice discounting

L.O 1.2 Assess the implications of the different sources of finance

Bank loan bear a fixed rate of interest that a company has to pay the bank. Moreover, bank loan is an obligation that has to be paid in future. Company has to shows that it has ability to pay the loan back, and shows the loan in balance sheet until it is paid. In case of bankruptcy, the company first has to pay its loan by selling its assets. There are also some restrictions and limits to borrow the loan from the banks, so no company can borrow more from its limits.

For debenture, there is an obligation to paying periodically a fix or floating rate of interest. Debenture holder cannot participate in decision making of the company as they are considered to be creditors of the company. In case of bankruptcy, debenture holder has second right to be paid after banks.

For initial public offering, first company has to decide whether it requires such financing. Moreover, raising funds from IPOs a lot of legal documentation and the company has to involve banks for its underwriting. Moreover, stockholder will become the owner of the company and can participate in the decision making process. The company has to pay dividend to its stock holder. In case of bankruptcy, the shareholder has last right on the assets of the company.

In retained earnings, there is neither a need to prove anything not there is an obligation to pay back. Company's controls remain in itself as it is internal source of financing and no outside party is involved. In case of bankruptcy, company just loses by its self but has no obligation to pay back.

In case of selling assets, there is no need of security and has no dilution control. However, selling the assets can lead company to lower productivity. In case of bankruptcy, there is no obligation to pay back.

LO2.1 Assess and compare the costs of the different sources ...