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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’.”
http://www.blogcatalog.com/discuss/entry/the-importance-of-finance-in-the-business-domain
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: –
Internal
External
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
Explicit cost
Implicit 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
Sale proceeds
Kd= Ki(i-t)”
