Sources of finance

Definition:
A company often needs external financing to operate in the short term and long term. Senior management usually reviews a firm's statement of financial condition to gauge cash levels needed in operating activities. Sources and uses of finance There are a number of ways of raising finance for a business. The type of finance chosen depends on the nature of the business. Large organisations are able to use a wider variety of finance sources than are smaller ones. Savings are an obvious way of putting money into a business. A small business can also borrow from families and friends. In contrast, companies raise finance by issuing shares. Large companies often have thousands of different shareholders. Sources of finance Uses of finance Shareholders Finance to set up and expand a business Bank Loans to finance capital projects. Overdrafts to manage cashflow Creditors Short term credit until goods have been sold

Function

A finance source, or financing method, helps an organization meet short-term operating needs, such as paying for costs of materials, salaries and other administrative expenses. Financing also helps senior leadership plan for long-term expansion projects, such as mergers and acquisitions.

Significance

Financing is a significant business practice in modern economies. A firm with no access to financial markets, or unable to raise funds privately, may have difficulties operating. Senior leaders may be unable to set long-term goals without funding.

Types:

Types of financing products vary, but the most common are equity and debt

products. Equity products include shares of common stock and preferred stock. Debt products include bonds, private loans and overdraft agreements.

Equity Financing

Equity financing helps top leadership raise funds by selling shares of equity, or stocks, on securities exchanges. A shareholder, also called stockholder, receives regular dividend payments and makes profits when share prices rise.

Debt Financing

In a debt financing program, a firm issues regular bonds or convertible bonds on financial markets. A buyer of bonds, otherwise known as a bondholder, receives periodic interest payments during the bond term. The principal amount is refunded at maturity.

Capital Structure How a company finances its operations. The three most basic ways to finance are through debt, equity (or the issue of stock), and, for a small business, personal savings. Capital structure usually refers to how much of each type of financing a company holds as a percentage of all its financing. Generally speaking, a company with a high level of debt compared to equity is thought to carry higherrisk, though some analysts do not believe that capital structure matters to risk or profitability. What Does Capital Structure Mean? The combination of a company's long-term debt, specific short-term debt, common equity, and preferred equity; the capital structure is the firm's various sources of funds used to finance its overall operations and growth. Debt comes in the form of bond issues or long-term notes payable, whereas equity is classified as common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements also is considered part of the capital structure. In the social sciences we mean by structure a complex of relationships sufficiently stable in varying circumstances to display the firm outline of a clear and distinguishable pattern. Structural stability of such a complex thus does not require complete absence of external change impinging on it. It is

true that the more violent the impact of such change, the less the pattern is likely to last. But as the social world is inevitably a world of unexpected change, any concept of stability applicable to it must refer to internal coherence in the face of external change rather than to absence of the latter. Consistency of the relationships which constitute the complex is thus of the essence of the matter. In economics, for instance, the static equilibrium concept of neo-classical economics means at bottom nothing more than this. It does not require a stationary world as its setting. If equilibrium means nothing more than consistency of a complex of relationships, it can be extended to the world of change if by dynamic equilibrium we mean consistency of plans. In the theory of capital we can thus easily speak of a structure as long as utilization plans succeed and capital goods stay where they are. But as soon as plans have to be revised and factor combinations reshuffled, a structure in this sense no longer exists. We might thus define capital structure negatively in terms of the absence of the regrouping of capital combinations. A capital structure, we might say, exists as long as the various capital goods remain neatly pigeon-holed in their respective capital combinations and are being replaced by their replicas as they wear out. In other words, capital structure might be defined in terms of the constant composition of the capital combinations which form the material backbone of production plans. But this, of course, is an essentially static notion of capital structure. It is not incompatible with economic progress as long as we assume that progress takes preponderantly the form of new investment, that is to say, as long as we assume that new capital combinations take their place side by side with the existing ones without disturbing the latter. This, in fact, is how the Keynesians, Mr. Harrod and even Professor Hicks, conceive of economic progress. It is only when we realize that the distinction between external capital change in the form of investment (formation of new capital combinations) and internal capital change (regrouping) is entirely artificial and that one cannot take place without the other, that we come to doubt the usefulness of this notion of capital structure.