Report on Fundamentals of Business Finance

Report

(Fundamentals of Business Finance.)

Introduction

For every business finance management is an important aspect for their growth and expansion, as it empowers businesses to plan for the future by making well-informed decisions. It not only helps in resource allocation and spending choices but also in identifying areas for cost reduction and achieving the company’s short-term, medium-term, and long-term objectives (zenithpartners.co.uk, 2023). The following report covers a detailed explanation of the finance function of the company named GotoHolidays which is a tourism company in the UK and its relationship with other functions. Additionally, it also covers the internal and external sources of finance, including their examples, advantages, and limitations. Furthermore, this report also delves into the most suitable finance source in detail.

Finance Function

Finance functions are the activities and procedures involved in handling a company's monetary assets to produce profits and help the decision-making process. This enables businesses to navigate effectively in today's business environment.

The purpose of the finance function

The finance function serves two main purposes

• To supply the fiscal data that other business functions need to operate effectively and efficiently

• To facilitate business planning and decision-making (bbc.co.uk, 2024)

Smaller businesses may not have the capacity to maintain the dedicated resources required for finance functions. However, larger businesses budget to hire experts who can manage their financial operations and oversee spending. The financial department keeps an eye on alterations occurring inside the company. It tracks how these changes influence the financial well-being of the business. Besides, the finance function also ensures that the financial records are always accurate and properly maintained. The financial information includes the revenue, operating costs, performance and cash flows of the business (bbc.co.uk, 2024).

Relationship with other functions

1. Marketing

In GotoHolidays company, the relationship between the finance team and the marketing team is relatively close because both departments are helping companies to achieve the revenue goal. The finance function allocates funding for marketing campaigns and also helps the marketing team with pricing strategy and marketing budgets (spiderdigital.co.uk, 2023).

2. Production Management

Financial management and production management teams are linked to each other in terms of source usage which helps GotoHolidays company to optimize the resources. The financial management team provides cost allocation assistance to the production team to ensure the necessary resources. Financial management also supervises the production cost and they help the organization to optimize the production cost also.

3. Human Resources

Finance management and Human Resources collaborate in different ways finance function helps budget management which includes the budget for salaries and compensation packages of the employees in GotoHolidays. Additionally, they also budget the health insurance and evacuation plans along with employee skills and development programs (Saputra et al, 2021).

Internal Sources of Finance and Examples

Internal sources of finance pertain to funds that are generated from within the organization itself. Internal finance sources are generated through the regular operations of an entity. Consequently, this indicates that there is no reliance on banks or lenders to fulfil the capital requirements of the company.

Retained earnings

Retained earnings are considered one of the great sources of finance for a business. Whatever the profit gained by the company it is known as the retained gain and there is no distribution with equity stack holders it is the assets for the equity shareholders. Retain earnings are easily accessible resources (Alqsass, et al, 2023). The company has full rights to their retained earnings. In the context of the risk the retained earnings are risk-free and safer options for the companies because this many is owned by itself

Accumulated depreciation

All of the companies have both fixed and current assets. To reduce the value of the fixed assets company uses accumulated depreciation (Sierpi?ska-Sawicz and Sierpi?ska, 2021). When an asset's economic life is coming to an end, depreciation is charged to finance its replacement.

Advance from customers

Getting advance from customers is also the source of internal finance for the organizations. Advance collected from customers is an important source for big organizations because when the big companies get orders from customers they charge advance payment.

Trade credit

Trade credit refers to when companies receive materials, goods, and equipment without making cash compensations. Trade credit is the internal source of finance where companies have no cash to give suppliers but they can make their payment later on (Rao et al, 2023). The benefit of trade credit is the company does not need to arrange money immediately they can arrange it later. That's why trade credit is one of the best pseudo sources of internal finance for businesses.

Reverse

This is another important source of internal financing for the companies that are reverse-managed by the organization. There are many types of reverse that can be managed by the companies and the amount spent on the particular reverse can be utilized by the organization till the date of utilization of that reverse for the particular purpose.

External Sources of Finance and Examples

The external sources of finance are the funds that originate from outside the organization. A significant number of new entrepreneurs do not invest their capital into their ventures; instead, they frequently rely on external funding sources. This may involve seeking financial assistance from friends or family or obtaining a loan from a banking institution. It is a very important source of finance for businesses because it is very hard to often them to protect the required investments to run the business.

Friends and Relations

Family and friends are some of the most common sources of external finance for businesses. There are multiple business owners especially new business owners choose this source for their business (Nguyen and Canh, 2021). The funds typically arrive in the form of a loan, which is expected to be repaid with low interest or potentially no interest whatsoever. Occasionally the business owners might be getting money in the form of gifts from their friends or family members.

Bank loans

Bank loan is also the most common source of external finance for businesses. Multiple business owners choose the bank loan option to invest money in their businesses. Banks consent to provide loans, and the borrower is required to refund the loan amount in the form of instalments over the years (bbc.co.uk, 2024). Borrowers also need to pay interest for that loan amount and these banks make their profits and run their operations smoothly.

Bank credit

Bank Overdraft is another important source of external financing and it is a short-term financial facility which is reconsulted each year where it depends on the performance of the businesses (Chantal, Tobias, and Mbabazize, 2024). A Bank Overdraft refers to when a business or organizations disburse more funds than the funds available in their bank description A bank Overdraft is a method which allows them to withdraw more funds from their bank account hence it is called an external source of finance because funds directly come from the bank. Overdrafts are only used when it is more necessary because it is very costly.

Government grants

Government grants are also a source of external financing because the new business can get money from the government. The objective of the government grants is to encourage people to start new companies that help to fulfil the requirements of the customers by providing the best services. In the UK there are certain conditions to get this money from the government the first one is businesses will create new employment opportunities and government grants come with interest-free (bbc.co.uk, 2024).

Advantages of Sources of Finance

Accumulated Depreciation:The main advantage of Accumulated Depreciation is it helps companies with tax savings and enhances financial performance (studysmarter.co.uk, 2024)

Retained profits: It is a quick and convenient source of finance for businesses. Because funds are easily accessible and there is no interest compensation

Advance payment: Getting advance payment from customers, provides an additional way of finding for the companies. It also builds trust between customers and the company.

Trade credit: It improves the cash flow management systems of the businesses. It also provides flexible payment options for the companies in the form of net 30 or net 60 days (bbc.co.uk, 2024).

Family and relations: The benefit of using this source of finance is that the amount getting from this source is low interest sometimes it's not needed to repay it.

Bank loan:The benefit of this source is it is simple and immediate to access. By using this source of finance companies can get suggestive amounts of funds at one time (bbc.co.uk, 2024).

Overdraft: The advantage of this source of finance is that it is easy and immediately accessible and allows companies to get emergency funds on an urgent basis.

Government grants: The main benefit of this source of finance is there is no need to pay back it and it is available for small businesses also (bbc.co.uk, 2024).

Limitations of Sources of Finance

Accumulated Depreciation: The persistence of Accumulated Depreciation is based on different assumptions and estimates which include the useful life of an asset and its residual value. These assumptions may not always match with actual conditions, resulting in potential inaccuracies in the calculated figures. These incorrect assumptions can misstate the financial situation of the company (Mazurina, et al, 2020).

Retained profits: The main disadvantage of using retained profit as the source of finance is once the money is distributed or gone then it is not available for any future use. Retained earnings represent a rather unstable approach to generating funds as a company's profits are constantly fluctuating.

Advance payment: It has higher capital expenses while as compared to other sources of financing advance payment can cause higher carrying expenses. It also affects the cash flow process of businesses.

Trade credit: In Trade credit there is no involvement of explicit interest but delay in supplier payment can cause high interest cost. The over-dependency on trade credit might reduce the Negotiating Power with the provider (Pattnaik, 2020).

Family and relations: If the proposed business idea faces a failure in the market the funds will be lost. Due to business failure, there might be arguments occur between relations.

Bank loan: In this source of finance companies need to pay interest mandatory and it is difficult for new businesses to get access to loans from banks.

Bank overdraft: In this source of finance companies need to pay prominent interest rates. Due to the high interest rate, it is a short-term funding solution for companies (Kurpayanidi, 2021).

Government grants: To get access to this source of finance businesses must need to fulfil certain requirements of the government. It requires more time for granted and for complete the paperwork.

Need for Different Sources of Finance for Businesses

Capital is essential for every business to manage and run the organization smoothly and it is also important for facilitating expansion and staying sustainable in the competitive market. Nevertheless, a business owner may not have adequate personal or business capital to invest in every facet of the company. Consequently, entrepreneurs find various sources of business financing to protect the necessary funds. Finance is one of the most essential things required to start a business. Because organizations require funds for multiple activities as a means to get capital assets, everyday operations, business growth and expansion and many more things. It occasionally happens when a business meets all its financial needs from its general profit in this situation business resorts to different sources of finance.

Most Suitable Source

Businesses experiencing cash flow challenges are best suitable with the following type of source of financing.

Owner’s capital

• It is possible that multiple business owner will use their personal funds to handle some portion of the liabilities.

• The benefit of this source of finance is it is immediate and convenient and, in this business, owners are not required to borrow the money from somewhere else additionally there are no payments of interest mandatory.

Bank loan

• Getting a bank loan is difficult but it's possible with a comprehensive business strategy

• The benefit of using this source of finance is that it is easy and immediately accessible and with this companies can get suggestive amounts of funds at one time.

Bank credit

• Using bank credit as the source of finance allows them to withdraw more funds from their bank account.

• The benefit of using this source of finance is that it is easy and immediately accessible and allows companies to get emergency funds on an urgent basis.

Conclusion

From the above explanation it is concluded that having good finance management is essential for businesses it helps companies to grow and sustain the business. In the organization, the finance department is widely connected with other departments also which include the marketing department to sets the marketing estimate then the production department sets the production budget and the human resource department manages employee salaries and many more things. There are two sources of finance which include internal and external sources of finance which including Retained profit, Bank loans, trade credit, government grants, friends and relations, advance payment, etc., The discussion also concludes that businesses have to rely on different sources of finance because their funds do not necessarily fulfil their financial requirements in different scenarios like cash crunch, expansion opportunities, product and service development opportunities, etc.

References

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