Accounting Finance Research

Topics: Debt, Loan, Investment Pages: 5 (1755 words) Published: March 10, 2015
Accounting & Finance Research
Why a business needs finance:
Finance: the management of large amounts of money, especially by governments or large companies. can be a real benefit when it comes to business success as well. your own personal finance helps you to understand how to manage not only business finances, but set goals and create fundamentals skills in planning and decision-making

Internal sources:

Internal financing is the name for a firm using its profits as a source of capital for new investment, rather than a) distributing them to firm's owners or other investors and b) obtaining capital elsewhere. Internal financing is generally thought to be less expensive for the firm than external financing because the firm does not have to incur transaction to obtain it, nor does it have to pay the taxes associated with paying dividends.  Funds an organization can raise from the employee contributions, member contributions, retained profits, sale of assets, sale of goods and services, etc. Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash. Internal sources of finance are recorded under equity in the balance sheet. These sources are reinvested profits and the capital contributed by owners when the business began This money may be: personal savings, an inheritance, a gift from parents, a payout from being retrenched from a job, a personal loan or mortgage loan using the family home as security. Internal sources (raised from within the organisation)

Put (the profit on a previous investment) back into the same scheme.

Advantages
Capital is immediately available
No interest payments
No control procedures regarding creditworthiness
Spares credit line
No influence of third parties
Disadvantages
Expensive because internal financing is not tax-deductible
No increase of capital
Not as flexible as external financing
Losses (shrinking of capital) are not tax-deductible
Limited in volume (volume of external financing as well is limited but there is more capital Available outside - in the markets - than inside of a company)

Capital contributed by owners:
Own capital is a costless form of finance, but carries the risk of the money being lost. For sole traders and partnerships a common source of finance, especially for start up is money from the individuals who are forming the business Retained Earning:

Retained earnings are an easy source of internal financing to use because they are liquid assets. Retained earnings are the portions of net income that you have retained in your company and not paid out. In a small business, retained earnings are usually paid out to the owners, who often do not draw a budgeted salary. Instead of paying out retained earnings, you can reinvest them into the company. Net profit that is reinvested into the business. Retained profit is added to equity because it increases the owners’ claim on the assets of a business. This source of finance is only available for a business which has been trading for more than one year It is when the profits made are ploughed back into the business This is a medium or long-term source of finance

Companies can increase funds by retaining profits and not distributing them as dividends. The shareholders deprived of capital will expect retained profits to be invested to achieve a competitive rate of return. Most big businesses retain 50% of profits to fund expansion. The cheapest form of finance is the business’ own profits

Since it is not being borrowed from anyone, it does not cost money to use.

Advantages
Doesn’t have to be repaid
No interest is payable
Disadvantages
Not available to a new business
Business may not make enough profit to plough back

External source:
External sources of finance are found outside the business, eg...
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