Business Finance
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Finance is a vital factor governing how a firm can properly manage its resources and, thereby, flow in its smooth operations. Businesses run into huge problems concerning handling their costs, investments, and growth without proper financial management, resulting in poor performance. This presentation will address important aspects of business finance, including its core functions, how it interfaces with other departments, and various sources of finance both internally and externally. We will also discuss the advantages and disadvantages of the sources so you can make an informed decision that builds more strength into financial management within your business.
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Finance can be considered as lifeblood of any organisation. It ensures that business organisations have all the required resources to carry out any activity in a hassle-free manner, while strategic decisions can be taken in a well-informed and knowledgeable way. If the right financial management were not there, companies would have to face a hard time controlling costs and investments as well as growth opportunities. In this session, we will outline some of the essential features of business finance; its functions as well as the relationship of finance with other departments as well as sources of finance to which business organisations may have recourse. We will summarise the advantages and disadvantages of these sources so you can make an informed decision.
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? Finance manages company funds.
? Functions include:
Budgeting
Forecasting
Cash flow management
Supporting decision-making through financial data (Pilbeam, 2018).
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The role of finance acts as the organisation's bank or where it stores and keeps control over the financial aspects of the company. Important activities include budgeting or how to allocate resources, and forecasting-that defines future terms of finance. Rather an important activity is cash flow management to ensure there's enough money available in a short-term demand and for long-term planning. Finance provides the basis for decision-making by way of financial data for use in making informed decisions, such as whether to invest in new projects or control cost in operation.
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? Finance and Marketing: Budgeting for campaigns.
? Finance and Operations: Providing capital for production (Vernimmen, Quiry, and Le Fur, 2022).
? Finance and HR: Managing payroll and employee benefits (Beltrán-Martín and Bou-Llusar, 2018).
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Finance is in close interaction with all other business functions. For example, in marketing, finance works hand in hand with the team to define budgets for campaigns and adverts to ensure that resources used in the campaign are neither too inefficient nor too extensive. In operations, finance comes up with the amounts needed for a company to procure equipment and most importantly control the costs of production. Regarding HR, finance ensures the payments for payroll and all benefits of employees are paid on time, so the employees feel satisfied with being engaged. All these collaborations help the business perform in well-rounded ways.
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? Retained earnings: Profits reinvested into the business.
? Sale of assets: Selling non-essential assets for cash.
? Working capital management: Optimising current assets and liabilities to expand cash flow (Alarussi and Alhaderi, 2018).
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Internal sources of finance come from the business itself. For example, retained earnings would be those profits that a corporation does not pay out to shareholders but rather re-invest in the business to expand on. Other internal sources would be selling non-core assets, for example, unused machinery or property, to generate the needed funds. Lastly, working capital management has to do with the efficient management of current assets like inventory and receivables; otherwise, there will be cash to handle the company's short-term obligations. Sources are inexpensive for these reasons: they do not consist of any interest payments or employ external parties.
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? Retained Earnings: Profits reinvested into the business.
? Sale of Assets: Selling vacant or non-essential assets to generate cash.
? Working Capital Management: Efficient management of receivables and payables to optimise cash flow.
? Reduction in Stock Levels: Selling surplus inventory to improve liquidity (Madura, Hoque, and Krishnamrti, 2018).
? Owner’s Capital: Personal funds inserted into the business by the owner (for sole traders) (Nguyen and Canh, 2021).
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Internal sources of finance are sourced from within the business and, therefore do not imply debt or equity acquisition from outside sources to finance the operations of a business. Retained earnings for example provide for instance a means of reinvesting profits back into the business instead of remitting some or all of these profits to shareholders. A second source is disposing of non-essential assets; which may include unused machinery and equipment to generate cash immediately. Another method is through the reduction of levels of stock held: selling off excess would help create liquidity. Lastly, in a sole proprietorship, capital from the owner's funds is easily found by a businessman-owner as he can easily tap into his savings and capital without borrowing. This also involves the effective collection of working capital which includes prompt cash collection for receivables and effective management of payables.
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? Bank loans: Borrowing from financial institutions, repaid with interest.
? Issuing shares: Selling equity to investors.
? Venture capital: Investors providing funds for equity.
? Crowdfunding: Raising small amounts of money from individuals (García-Quevedo, Segarra-Blasco, and Teruel, 2018).
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External sources of finance are those coming from outside the business. One of the most common ones is bank loans, through which the company borrows money with the repayment being made by paying interest over a certain time. Another one includes issuing shares where part of the ownership of the business goes to investors who raise money for the business. Finally, venture capital provides money to investors in companies that have a high growth potential. Crowdfunding represents a new platform that has attracted many startups because it allows businesses to raise smaller amounts from a large number of people, most through online platforms. Such sources provide substantial funds but entail some loss of control or interest repayment.
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? Bank Loans: Fixed amount hired with interest over a set period.
? Issuing Shares (Equity Financing): Selling ownership risks to raise funds.
? Venture Capital: Investment in exchange for equity, frequently used by startups (Metrick and Yasuda, 2021).
? Crowdfunding: Raising small amounts of money from a large group, regularly online (Hervé and Schwienbacher, 2019).
? Government Grants: Non-repayable funds for exact projects, subject to conditions (Korinek, 2018).
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External sources of finance are those outside the business. It is necessary because larger amounts of money for expansion or long-term projects can be raised. The most common source is a bank loan, where there is a fixed sum borrowed and repaid with interest over time, though full ownership is retained by the business. Issuing shares also allows a company to raise money, as it sells equity to investors; however, this does dilute ownership. There is the option of venture capital, more specifically for new ventures, whereby investors will invest money that seeks a proportion of the business. Crowdfunding has emerged popularly, particularly on online platforms, where money from many people may be combined to create a pool for even smaller amounts. Lastly, government grants offer non-repayable funds for certain initiatives, but they are very competitive and at times attached to strict conditions.
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Equity Financing: No repayment or interest requirements.
Debt Financing (Loans): Retain full ownership and control of the business.
Grants: No essential for repayment or interest.
Retained Earnings: Internal funding with no compensation or interest costs.
Leasing: Low upfront cost for obtaining assets without the need to purchase outright (Allen, Qian, and Xie, 2019).
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Each source of finance has its characteristic benefits and suits businesses better than others depending on their need. For example, the sources of equity finance raise capital which does not have to be repaid nor paid interest upon, allowing businesses to facilitate growth without any forthcoming financial demands, though it would dilute ownership. Debt financing, such as borrowing from a bank, allows for total control as one would only be obligated to make regular interest payments while having large amounts of money at one's disposal. Grants are very appealing because they have no repayments and do not have interest attached, so, as a source of funds, they are very cheap. Retained earnings are an attractive alternative because an internal source of funding does not involve any external finance cost. Finally, leasing lets companies acquire assets with little up-front cost, conserving cash flow while getting the necessary equipment or other resources.
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? Equity Financing: Dilution of ownership and control.
? Debt Financing (Loans): Requires regular refunds with interest, increasing financial burden.
? Grants: Highly competitive and often come with preventive conditions.
? Retained Earnings: Limited by the company’s profitability, may not be adequate for large projects (Zutter and Smart, 2019).
? Leasing: No ownership of assets, can be costly in the long term (Zeynalov, 2020).
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While each source of finance has its benefits, there is also a serious limitation associated with it. For example, in the case of equity financing, some ownership of the business is given up. This results in diffusion of control over the business as well. In the case of debt financing through loans, a steady obligation of repayment of loans with interest is incurred. It might be a serious problem, especially during low cash flows. Though grants are very competitive, and often carry strict conditions on how funds can be disbursed and, in many cases, imply no repayment, they are quite attractive. Retained earnings, though cost-free in interest, again are limited by corporate profits and so may not be capital enough for large-scale investments. Avoids up-front costs; however, because the business never owns the assets, it tends to become very expensive over time, especially when the need is long-term.
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? Diversify risk across different sources.
? Different needs: Short-term vs. long-term financing.
? Owner funds may not be sufficient for all business needs (Estrin, Gozman, and Khavul, 2018).
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Different businesses often require diversifying finance sources, where the use of one type of finance can be applied to minimise risk and different needs that various businesses have. Diversifying financing options minimises reliance on one kind of finance and creates spread risks across a variety of sources. Another reason is that every project has different funding requirements. Take, for instance; maybe working capital needs to be used for short-term operational requirements, whereas equity or loans may be needed for long-term investments such as entry into new markets. In this sense, owner funds would be insufficient and therefore, external finance becomes a necessity for larger or growing companies.
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? Scenario: A mid-sized company looking to expand operations by opening a new branch.
? Suitable Sources:
Bank Loans: Provide a large number of capital with manageable interest.
Venture Capital: Ideal for businesses with high growth potential.
Retained Earnings: Cost-free option, if available.
Leasing: Reduce truthful costs for equipment and infrastructure (Avila Rodríguez, Rodríguez Barroso, and Sánchez, 2018).
? Argument: Based on control preservation, growth potential, and funding needs (van Lenteren et al., 2018).
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Let's take an example where a mid-size business wants to increase its capacity by setting up a new wing. The business needs to rely on a lot of finances to provide for the infrastructure, staff, and other equipment. In such an example, bank loans would be quite suitable due to access to large amounts of money and full ownership by the business except making interest payments in the form of regular interest payments. If the business has high growth potential, then venture capital could be another route. Although this would mean giving away some equity, it often comes with expertise in the industry and strategic advice from venture capitalists. Retained earnings, if one is available, is a no-cost option, but they might not suffice for this size of a project. Leasing will also facilitate the acquisition of needed equipment without fronting large amounts. The above thought can be used to ensure that cash is available in the expansion. For this particular project, a blend of the sources mentioned above will be used to furnish the flexibility and the capital necessary, while at the same time maintaining a balance between control, cost, and risk.
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Finance is necessary to fund both the funding of day-to-day business operations and long-term growth. Both have their advantages in contrast and limitations. For example, retained earnings through internal sources may be cost-effectively low in size, whereas venture capital and other forms of loans available through external sources may provide larger money sums but also repay and possibly a loss of control. Therefore, there is a requirement to achieve sustainable growth and address risk using a balanced financial plan that is comprised both of internal and external sources.
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In conclusion, Finance is very important to every business as it provides the necessary resources to sustain operations and grow. For the most of this presentation, we have covered internal sources of finance and external sources of finance with their merits and demerits. Internal sources are usually cheap sources, but they also have a limited scope in most cases. Loans or equity financing can provide substantial amounts of money but have the cost of repayment or ownership dilution. Thus, in business finance, the bottom line is that enterprises need to employ an integrated financial strategy where varied sources of finance are incorporated to cover both their short-term operational needs and long-term expansion purposes. This will thereby put them in a favourable position in the marketplace, positioned to be competitive and flexible at all times.
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