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Short-Term Financing

Discuss about the International Financial Reporting Standards.

The most important component initiating a business is financing. As such, even the most basic form of business incurs start up costs. Therefore, financial resources can be acquired from various sources. Financial resources required for financing operations as well as purchase of assets include personal accounts of the founder of the company. On the other hand, loans along with lines of credit might perhaps be granted from various financial institutions, friends and family, private financiers as well as governing bodies. Furthermore, there are several grants that can be offered from various private as well as public sources to specific entrepreneurs of diverse demographics as well as personal state of affairs. As rightly indicated by Hopper & Bui (2016), financial resources refer to different financial funds of the business enterprise. From the economic standpoint, financial resources can be considered to be fraction of the asset of the business enterprise (property). Every so often, financial resources can be considered to be just financing, for example, business finance, personal finance as well as public finance . Managers operating in the finance department need to be sentient of the manner they plan to fund and fitting sources of finances that is appropriate sources of funds (Vernimmen et al., 2014). It is important to take into account various available source along with the possible long term impacts to the corporation at the time of dealing with long term funds.

Essentially, there are different factors that affect sources of finances. Fundamentally, the sources of finances selected depend on certain factors namely purpose (that indicates towards the purpose for which the fund will be used for), time period (period for which the finances can be required), amount (the amount of money that is required by the businesses) together with ownership and size.

In terms of time period, financial resources can be classified as short terms and long term funds.

Levi & Segal (2015) suggests that short term finance is usually utilized to fund daily operations. Different examples of short term funds take in short term loans, trade credit, facilities of overdraft as well as lease finance.

Overdraft: Overdraft is undoubtedly extremely suitable since this can be paid off at any specific time period. Nonetheless, facilities of overdraft can essentially be reserved at specific period from a particular entity of business otherwise person

Trade Credit: This source can be considered to be useful to various new units of businesses since disbursement of particularly current liabilities can necessarily be deferred (Levi & Segal, 2015)

Lease Finance: Unusually this can be considered to be cheaper than locating funds to purchase assets.

Short term finances are profoundly used by different businesses having peaks in certain season else wise small sized trade looking forward to disburse remuneration to members of the staff of the corporation, ordering of inventory and many others.

Prohorovs & Beizitere (2015) suggests that trades often have need of funds (particularly, long term in nature). This is necessarily more expensive and at the same time less flexible. This helps in financing major investment projects. As correctly indicated by Chang et al., (2016), varied sources of fund (particularly, long term) obtainable take in debt funds, equity funds, venture capital as well as leasing.

Long-Term Financing

In case of debt backed funding system, business might look for to raising funds from various financial mediators namely bank. As such, Debt funding unconnected to equity based funding can be said to be cheaper as interests on disbursements acquires tax relief (Donohoe, 2015). This refers to the fact profit acquired after tax (PAT) is over and above a specific amount than it necessarily would if organization acquired equity funds. Donohoe (2015) says that organizations might probably decide to acquire funds through issuance of debt as firm’s shareholders are not always keen to put in higher fund or capital amount. Again, there are two bonds categories namely redeemable ones otherwise irredeemable ones. Different categories of particularly bonds take in floating rates of debentures, various convertible bonds as well as zero coupon bonds.

In case of equity finance, a specific business might perhaps decide to acquire finances by means of issuance of shares for raising capital. Essentially, equity shareholders own various ordinary shares and can possess rights and power of voting. As such, the rights possessed by them show that shareholders exert certain control within the company (Fraser et al., 2015). Even though equity finances is relatively pricey because of greater amount of risk to financiers, to deliver a larger funds pool for various big companies that might perhaps participate in trade activities globally. Three different classes of share capital include shareholders (that is to say the ordinary ones), shareholders with cumulative preference as well as non-cumulative preference shares.

Ordinary shareholders necessarily possess voting rights. However, they are at the base of the listing of creditors during liquidation. As such, ordinary shareholders acquire gain from any excess funds prepared by the corporation.

Shareholders particularly the ones with Cumulative preference ones possess diminutive rights and power of voting. In essence, they acquire a set sum for every company share (Levi & Segal, 2015). In case if a business concern fails to make payments for dividends, then the holder gets entitled to different missed payments at the time when the subsequent dividend/bonus is pronounced.

Non-cumulative preference shares- In case if a business enterprise fails to make disbursements for dividend, the holder is not entitled to missed payments when the following dividend is pronounced.

As rightly put forward by Scott (2015), sources of finances of a business concern can necessarily be classified as internal as well as external sources. Internal sources refer the ones that are raised from within the corporation and external sources refer to the ones that are raised from outside the corporation (Williams, 2014). There are essentially five different internal sources of acquiring finance that include investment of owners, various retained profits, stock sale, sale of various fixed assets as well as debt collection.

As correctly put forward by (), internal resources of a firm can be considered as funds that originates from savings of business owners. Nevertheless, it might perhaps be in the structure of start up business and capital that can be used once the business is building up. In addition to this, it might possibly be in the shape of additional capital used for the purpose of development (Williams, 2014). () asserts that this is essentially a finance source in the long term period. Benefits of investment from different owners are that there exists no requirement for repayment and interest is not to be paid. Weakness also contains diverse limitations to specific amount that a possessor can put in. Again, internal supply of finance also includes reserved proceeds. Intrinsically, this is a specific foundation of finance that is only obtainable for business concerns that has been carrying out business for more than a year. Particularly, it is the point in time when profits earned can get returned into the trade again (Williams, 2014). This is necessarily an intermediate else wise finance source during the long term. Benefits of attainment of retained profits is that it does not need to be repaid and no amount of interest is payable. Disadvantages of retained profit are that it is not available to newly established businesses. Also, businesses might not make adequate profit to plough back to business.

Debt Funding

Internal sources also include stock sale. This refers to money that can be acquired from selling different stock of a business that has remained unsold. Essentially, this is necessarily a thing that takes place at a time when profits earned by a business can again be ploughed back to specific business. Sale of stock can be indicated as short term resource of funds (Vernimmen et al., 2014). Particularly, this is a fast way of raising funds and by means of selling stock it decreases costs related to holding the same.

Again, internal sources include sale of fixed assets. In particular, this is a monetary resource that comes from marketing fixed assets, namely, a particular part of a set of equipment that is no more required. Also, business entities also do not possess excess fixed reserves that can be sold out. Again, there is also a constraint or constriction to fixed assets a company can put up for sale. Essentially, this is also source of funding for medium term. Van der Stede (2015) considers to be an appropriate way to raise funds from asset that is no more required. Again, there are also some businesses that are not likely to have additional assets to sell. This is also considered to be a slow mechanism for raising funds.

Debt collection can be considered to be an important internal source. A debtor is a big shot in debt. A specific business can raise funds by acquiring money owed to the ones from particularly the debtors. Again, not all business operations have debtors who necessarily handle cash. Essentially, this is a short term funding source.

As correctly put forward by Scott (2015), bank loan can be considered to be an external source. Essentially, this is money borrowed at an agreed interest rate over a specified time period. This is essentially a source of medium term period. Again, bank overdraft is where businesses are permitted to be overdrawn on the account. This implies that they can still write down cheques even though they do not have adequate money in account. In particular, this is a short term source of funds. Also, additional partner is also an external source of finance and this is a source of funds appropriate for partnership business. Essentially, the new partners can necessarily contribute towards additional capital. As indicated by Robinson et al., (2015), share issue can be regarded as a specific source of finance that is apposite for Limited Corporation, involves issuing more amount of shares and is a long term source of fund. Additionally, leasing is like renting a specific asset and this involves presenting set compensation. Essentially, this is a medium term source of funding. Another source of finance includes hire purchase that refers to a method that permits a business to acquire lump sum amount (Prohorovs & Beizitere, 2015). This entails payment of an initial deposit as well as regular disbursement for a specified time period. Mortgage is another external source of finance that indicates towards loan secured on specific property, repaid in instalments over a time period normally over 25 years.

References

Acharya, V. V., & Ryan, S. G. (2016). Banks’ financial reporting and financial system stability. Journal of Accounting Research, 54(2), 277-340.

Bhattacharya, S., & Londhe, B. R. (2014). Micro Entrepreneurship: Sources of Finance & Related Constraints. Procedia Economics and Finance, 11, 775-783.

Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Brooks, R. (2015). Financial management: core concepts. Pearson.

Butler, A. W., Cornaggia, J., & Gurun, U. G. (2015). Substitution between Sources of Finance in Consumer Capital Markets. forthcoming in Management Science.

Chang, H. S., Donohoe, M., & Sougiannis, T. (2016). Do analysts understand the economic and reporting complexities of derivatives?. Journal of Accounting and Economics, 61(2-3), 584-604.

Donohoe, M. P. (2015). The economic effects of financial derivatives on corporate tax avoidance. Journal of Accounting and Economics, 59(1), 1-24.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.

Fraser, S., Bhaumik, S. K., & Wright, M. (2015). What do we know about entrepreneurial finance and its relationship with growth?. International Small Business Journal, 33(1), 70-88.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Gupta, S. L. (2017). Financial Derivatives: Theory, concepts and problems. PHI Learning Pvt. Ltd..

Hopper, T., & Bui, B. (2016). Has management accounting research been critical?. Management Accounting Research, 31, 10-30.

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.

Hull, J. C., & Basu, S. (2016). Options, futures, and other derivatives. Pearson Education India.

Hussain, J. G., & Scott, J. M. (Eds.). (2015). Research handbook on entrepreneurial finance. Edward Elgar Publishing.

Levi, S., & Segal, B. (2015). The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities. European Accounting Review, 24(4), 801-822.

Prohorovs, A., & Beizitere, I. (2015). Trends, sources and amounts of financing for micro-enterprises in Latvia. Procedia-Social and Behavioral Sciences, 213, 404-410.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Van der Stede, W. A. (2015). Management accounting: Where from, where now, where to?. Journal of Management Accounting Research, 27(1), 171-176.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.

Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.

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