sources of finance Flashcards
how sources of finance can help large organisations
* Control costs and expenditure
*This avoids financial problems and the need to borrow money to cover costs. Management may need to take action to reduce costs. They will need to identify where costs/expenses have increased which should help it be more profitable
* Monitor cash flow
*There needs to be enough ‘cash’ available to be able to pay bills. A business may be profitable BUT have poor cash flow resulting in poor liquidity and often business failure. Producing cash budgets assists with this. By closely monitoring cash flow this will allow the business to take corrective action if any problems arise to ensure proper liquidity
Forecast trends
Preparing budgets and looking at past financial records helps to identify what might happen and action can be taken. This will help to plan for future costs, revenue and profits which will improve the organisation’s efficiency
Monitor performance (historical)
Information can be used to compare one year against a another to see if performance has improved. It is useful to see if action taken in the past has worked. It also allows corrective actions to be taken if problems are spotted
Inform decision making
Managers make lots of decisions. Financial information allows budgets to be prepared for internal uses. Budgets assist with decision-making and planning and will influence a course of action this should help an organisation’s performance and profitability
different sources of finance
- retained profit
- sale of assets
- share issue
- bank loan
- commercial mortgage
- debt factoring
- debentures
- grants
- venture capital
- crowd funding
retained profit
This is when a business saves a portion of its profits and reinvests into the company.
sale of assets
Such as machinery, vehicles or even land and buildings which are idle, can also be a large source of cash to fund new projects
share issue
Share issue is a source of finance that is only available to private or public limited companies. Such businesses can decide to issue more shares in the company and obtain finance from their sale.
bank loan
Banks will lend businesses money over a set period of time
commercial mortgage
A commercial mortgage is a long term source of finance. It is a sum of money borrowed from the bank that is secured against a business property and paid back in instalments, usually over a long period of time.
debt factoring
Debt factoring is a short term source of finance where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.
debentures
Debentures are loans given to the business by individuals. Interest is paid annually and the loan is paid back in full at an agreed date in the future.
grants
A grant is a fixed amount of money usually awarded by the government, EU (European Union) or charitable organisations. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment.
venture capital
Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.
crowd funding
Crowdfunding involves getting small amounts of finance from a large amount of people. This is usually done through social media or crowdfunding websites. Crowdfunding investors may:
- donate money
- get rewards for their investments
- receive a share of the profits
factors when selecting source of finance
- the purpose of the finance
- objectives of the organisation
- amount of finance required
- the type of business (not all sources of finance are available to all businesses)
- length of time the finance is required for
- finance cost (interest rates)
- payback terms
