MANAGING FINANCE

Managing Finance

Managing Finance

Task # 1

Alternative sources of finance

Every business in order to organize and arrange finance for running a business required some sort of investment. There are several sources of finance available to business which is broadly divided into two parts:

Internal Sources

External Sources

Internal source of finance is regarded to be financing from one of the internal factors. It is merely income generated from revenues. Internal sources of finance include:

Retained Profits

Sales of existing profits

Cut down stocks level

External source of finance is merely from outside sources which includes both debt and equity financing. External sources of finance include:

Short-term

Medium-term

Long-term

Short-term financing includes; Bank loan, bank overdraft, creditors and debt factoring. Medium-term financing includes; hire purchase, leasing and medium term loan. Long-term financing includes; shares, debentures, grants and long-term bank loans. Short term, medium term and long term financing completely comes from outside sources.

Concisely sources of financing can be summarized into:

Equity Financing

Debt Financing

Implications of your identified sources

Internal Sources

Businesses are presumed to have some portion of the profit every year for future purpose. This is regarded to be ploughed back profit. With passage of time, this sum amount to huge this can be used for financing the business. Businesses might also in order to generate more cash for business sell off old and obsolete assets which are considered to be outdated. Businesses can also raise additional cash with reduction in stock level.

External Sources

Businesses can generate cash through bank loans over repayment of principal in future with yearly interest charges.

Bank overdraft is facility provided by banks to its customers who having current accounts. This facility provides customers to overdraw their accounts much more than their balance in the account. Amount to be overdrawn is required to ascertain in advance with the bank manager. In reaction bank grants a limit over withdraw amount and business are able to meet its short term liabilities by crossing cheque up to limit allowed.

Trade credit facility is provided by many suppliers that they extent duration of payment with no interest charges. This provides businesses some sort of short-term finance to utilize in generating business.

Factoring of debt is considered being short term financing for businesses through selling its bills receivable to a debt factoring company over a discounted price. This provides business access to quick cash.

Hire Purchase relates to purchasing an asset with facility of paying over a longer period of time that is sum portion initially as down payment and rest over the time period agreed upon in instalments. Businesses required paying off interest on these instalments.

Leasing is considered to be transfer of assets but not ownership. Businesses with help of it can able to lease a machinery, equipment or building over and does not require purchasing it. It is required to pay lease rent as periodic payment up to time asset is under use by business.

Issuance of shares is most permanent and long term source of finance but it is only available to limited ...