Introduction To Finance
Finance is the key requirement for any business. It is not only required for starting up a new entity but also needed to keep it running. Finance can be stated as lifeblood of any organization and thus, it is very important to manage it so that optimum utilization of money can be taken (Bird and McHugh, 1977).
The level of competition is booming in current business world and in such circumstances effective use of finance can provide a comprehensive edge of the competitors.
Sources of finance
The financial requirements can be fulfilled by internal as well as external financial sources. Internal sources include all those ways by which a firm can generate fund from inside, such as retaining earning or selling of assets.
On the other hand external sources like bank loans manage the fund from outside the business (Mumford, Schultz and Osburn, 2002). Suppose that an individual is planning to open a new computer shop and for that he requires the investment of around £700000.
Implication of different sources of finance
The funding requirement of owner is £700000 for starting a new business unit. Any of the above defined sources of funding can be selected by the owner but each of them includes some cost. For example, if bank loan is selected than owner will have to pay interest on it so as if loan is taken from other financial institutions.
And after the period of agreement owner will need to make the full payment of principle amount. Another option is going for public or private limited company. If he goes for public limited company, he will be able to issue shares and can generate money from it.
On the other hand if he goes for private limited company then the fund can be arranged from participating members (White, Sondi and Fried, 2003). Own savings or arrangement from friends/relatives is the best source as there will be no or very few interest.
Advantages and disadvantages of appropriate sources of finance
As the advised sources are raising fund from family and friends but it has its own advantages and disadvantages. If the funding arrangement is made from this source than owner will not have to pay huge interest like bank. But the major drawback of this source is negative impact on personal relations.
If bank loan is used by the owner than the ownership of business will not affected and his rights over the management will remain secured. It is most commonly used way of fund rising as it is available on nominal interest charges.
The key disadvantage of this source is interest. The firm will need to pay interest on regular basis either earning profit or loss. If the firm is making loss then also interest will needed to be paid and principle amount on maturity (Rohrich, 2007). Firm will also have to bear processing charges for this source.
Cost of different sources of finance
There are two most appropriate sources of finance available for purpose of setting this business, one is bank loan and another is leasing. If the loan is once approved than firms will be able to use bank overdraft facility too in urgent situations. If the bank loan is used by the firm for arranging finance than it will have to pay the interest either it is earning profit or loss.
So interest is the major cost than has to be paid by the user. The interest will paid on periodic interval till the final payment of principle amount. After the period of loan the principle amount will need to be paid off. In order to arrange required assets company can go for leasing. By using this feature, company will not need to raise fund for buying assets.
In this way the ownership of asset will remain to lesser but the lessee can use it by paying rent for it (Damodaran, 2012). The cost of using this way is rent that need to be paid on period basis.
Thus, after the use of different tools of financial management it can be stated that finance is a key requirement for any business and include some cost. In order to remain strong in market place it is must for firm to take best possible use of its financial resources.
The financial statements can evaluated by using ratio analysis and investment decisions should be made after analysing the projects using capital management techniques.
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