Introduction
Unit 2 Managing Financial Resources and Decisions Assignment Help Online
Requirement 1
1.1 Why business needs finance and what are the available sources of finance to a business
Every firm, no matter how big or little, requires money for a variety of purposes, including expansion, working capital, or startup. The amount of money needed will vary depending on the business’s activity; for instance, working capital will require less money than business expansion will. A company can obtain funding from a number of sources, including equity, debt, retained earnings, venture capital, and seed money. However, the choice of source is determined by how those monies will be used. The primary responsibility of a finance manager in a business is to increase shareholders’ wealth, which is a far broader concept than profit maximisation and can involve a variety of sources of funding.
Unit 2 Managing Financial Resources and Decisions Assignment Help Online
Therefore, it is crucial that the proper balance of money be achieved. The sources of financing can be categorised in a variety of ways, but they can essentially be divided into two groups: own funds and loan funds. 2005 (Atkinson)
Unit 2 Managing Financial Resources and Decisions Assignment Help Online
Own funds: In a larger sense, these are the sources that primarily belong to the organisation. Equity and retained earnings are two of these sources’ most prominent instances. When a company chooses equity capital, it must give shareholders shares of stock in exchange for the funds. Even if the shareholders are the rightful owners of this money, the company is not obligated to repay it until it has been dissolved by court order.
Since a business is seen as a perpetual entity, it is thought that it will continue to operate indefinitely despite changes in ownership. As a result, it is assumed that the company would not be required to return the shareholders’ money. Own funds also include retained earnings. Read 10 earnings of those earnings that the company has invested in throughout the years.
Loan Funds: As the name implies, loan funds are money that the company has borrowed from the market. On certain kinds of funds, an organization is required to pay interest. Debentures, term loans, and bonds are a few examples of lending funds.
1.2 Access and compare the implication of the different sources of finance
Both small and large companies have access to a variety of financing options. The potential effects on the business for each of the sources of funding listed below will be evaluated. Short-term funding sources may only be utilised to pay for necessary working capital. To cover the margin requirements for working capital loans, they cannot be used to fund fixed assets. (1968, Newlyn)
Trade credit is defined as credit extended to a customer by a supplier of goods or services during normal company operations. It makes up a sizable amount of short-term funding in a business due to competition. Trade credit is an ad hoc source of funding that makes it possible for
Accrued Costs:
An accrued expense is an accounting expense which the company owes to a person or organisation, but is already reflected in the firm’s balance sheets. Expenses that have already accrued must be paid at some point in the future. The cost of the goods or services the business has already received is a liability.
Financial Statements:
When a company has a solid credit standing, it is permitted to issue commercial papers, which are short-term unsecured promissory notes. It was an important money market tool that was first established in the USA.
Deposits between corporations (ICDs):
Unit 2 Managing Financial Resources and Decisions Assignment Help Online
Inter-corporate deposits, sometimes known as ICDs, are deposits made between two businesses. Six months is the typical time frame for such deposits.
Through the development of additional assets and infrastructure, long-term financing enables a corporation to grow and expand. The following is a discussion of certain long-term financial instruments:-
Equity share capital is the cornerstone of any company’s financial resources. To raise money to finance the business, a portion of the company’s ownership is sold. Equity shareholders are granted voting privileges in all corporate matters. Equity shares do not have a maturity date or a dividend payment requirement. (1968, Newlyn)
1.3 Critically evaluate the appropriate the sources of finance for the above mention businesses
Case 1: In this scenario, a building worth £ 150,000 and equipment costing £ 400,000 must be installed. In this scenario, the company can borrow money to pay for both the facility and the equipment through hire-purchase agreements. Debt financing has the benefit that interest on these loans is deductible from income, saving the company money in taxes. When purchasing equipment on hire buy, the organisation will be able to avoid paying interest fees that would have otherwise been incurred. (2006) Faulkender and Petersen
Unit 2 Managing Financial Resources and Decisions Assignment Help Online
Case 2: In this scenario, the person can use the £70,000 in redundancy compensation and finance the remaining amount through term loans. As a result, the person might save interest on the £70,000.
Case 3: Because the organisation is a public limited company, equity funding is an option. The company would avoid having to pay interest costs in this way.
Case 4: In this particular instance, the business has the right to request a three-month credit period extension from the creditors. This would enable the business to make on-time bill payments. The most often used source of funding is trade credit.
Case 5: The club may think about offering its shares as an alternative as it is in the process of being promoted to the Zurich Premiership. As a result, the organisation may have a strong capital basis and, more importantly, wouldn’t have to pay interest on it.
M1: Critically evaluate each available sources of finance to that particular firm. Evaluation should include the pros and cons, and legal aspects of each source
Debt financing has the benefit of being tax deductible for interest payments made on the debt. As a result, the true cost of debt is less than the true cost. On the other hand, an organization’s liquidity position may suffer from having too much debt.
The primary benefit of equity financing is that it does not require repayment while the organisation is in existence. However, issuing an excessive number of shares may reduce the organization’s capital base. (Rossi, 1928)
