Sources of finance, Importance of Cash flow and improving Liquidity (Essay Sample)
Business organizations require constant funding from the time it is founded and to the time it grows and expands. However, access to this crucial resource is always limited and any available source is always very expensive to acquire. This puts pressure on the existing forms of financing that are considered cheap. Nevertheless, sources of finances must be sought or else the businesses will never grow.source..
Sources of finance, Importance of Cash flow and improving Liquidity
Sources of finance for business organizations
Business organizations require constant funding from the time it is founded and to the time it grows and expands. However, access to this crucial resource is always limited and any available source is always very expensive to acquire. This puts pressure on the existing forms of financing that are considered cheap. Nevertheless, sources of finances must be sought or else the businesses will never grow.
There are several source of finance that can be used by companies and small businesses to fund their activities. These sources are categorized as external and internal sources where internal sources are funds obtained within the firm’s operations and owners while external sources are those obtained outside the company (Hall, Jones, Raffo, and Anderton 2008). Sources of finances can also be grouped into short term sources or long term sources of finances. Short term sources are finances that will be available for use within a short period, say one year while long term finances are those that can be used in the business for more than one year.
Among the short term sources of funds is trade credit which is typically offered by suppliers and can be used by the company to run its activities and later pay the suppliers. It is normally in terms of goods or services. Another source of short term capital is the bank overdraft which is offered by banks. Bank may allow a firm to withdraw more than it has in its account and repay the short loan later with a higher interest.
Bank loan is also another external source of financing that is provided by banking institutions and other lenders. The funds are suitable for larger projects and can be used for a longer period depending with agreements with the lender. Bank loans are however quite expensive and takes time for the bank to give out a loan due to risks involved in lending. Leasing of properties can be a source of external financing to business which requires properties and machineries for business purposes. It can therefore enter a lease agreement instead of purchasing new assets which may be very expensive (Hall, Jones, Raffo, and Anderton 2008).
For long term and bigger projects, capital can be acquired from sale of shares to the public. This is however a very expensive and procedural way of financing where a company gets listed in a stock exchange for the public to buy shares and become owners of the company. The capital raised remains with the company as long as it exists and is suitable for companies which have already proved to be very profitable and are seeking to expand further.
There are other internal sources of capital that can be explored by businesses, especially smaller ones. This includes savings made by owners of the company. In the case of start-ups, savings may also include contributions from friends and families of the entrepreneurs who are starting the business. Angel investors can also finance smaller companies in return for ownership.
Retained earning can be used to accumulate capital for the business instead of sharing out all the profits. The retained earnings is very effective since it has no interest charge and very good for smaller firms and large corporations as well. Government and non governmental institutions can also be used to finance businesses. Such arrangements are normally aimed at boosting young enterprises and other social business that the government may find it important and viable. Sale of assets that are not in use or inefficient properties can also serve to boost capital reserves of a corporation. The various sources of capital however have their advantages and disadvantages but can be chosen to serve specific purposes that depend on the size and nature of business an organization engages in.
Importance of cash flow to businesses
Cash flow is the movement of cash in and out of the business that arises from various activities that involves expenditures and regeneration of money in the business. These activities include investing, financing and operational activities. Such activities creates a flow of money that may be good if more cash is available and may be problematic if it leads to low cash availability within the business (Hall, Jones, Raffo, and Anderton 2008). This makes it important to improve cash flow in such a way it maintains liquidity at optimal levels.
Cash flow concept is important to business because it shows the liquidity levels of a business and consequently how able is the company able to meet its financial obligations. In the face of bankruptcy, cash flow helps to ascertain whether the firm is in good health and any sign of problems can be identified earlier by monitoring the cash flow of the business.
Consistent cash flow also helps the firm to take advantages of investing opportunities if managed well. Since cash flow determines the liquidity of a business, it therefore means that predictable series of cash in and cash out can be used take advantage of opportunities through decision making that is derived from the cash flows. It is also important to management since cash flows shows areas which reduces the company’s inflows of cash.
Important information can be derived from cash flow statements that will help in determining how profitable a project is. It thus can be used to calculate the internal rate of return of a project. Cash flow also helps in valuation of private firms and can be used to project the worth of business in the foreseeable future. Lastly, it is important in risk analysis of an enterprise and ...
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