Identifying Finance Sources and Economic Decision Making in Finance

This report provides an introduction to finance, focusing on the identification of different sources of finance, both internal and external, along with their respective advantages and disadvantages. The internal sources discussed include owner's investment, retained profits, sale of stock, and sale of fixed assets, while external sources encompass bank loans, share issues, leasing, and mortgages. The report then delves into the information required to make informed economic decisions, emphasizing the importance of the balance sheet, income statement, and cash flow statements. Furthermore, it describes the information needed by finance providers, such as investors, lenders, and suppliers, to assess the financial health and creditworthiness of a business. The report concludes by underscoring the significance of financial statements in securing funding and making sound investment decisions.

INTRODUCTION TO
FINANCE

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
1. Identifying the source of finance with its advantages and disadvantages........................3
2. Describing information which needed to make informed economic decision with regards
to finance..............................................................................................................................6
3. Describing information which need by finance provider...................................................7
CONCLUSION.........................................................................................................................7
REFERENCES.........................................................................................................................8

INTRODUCTION
Finance is considered as the art in which management of money takes place.
It is a type of field which is concerned with allocation of assets and liabilities over a
specific period under a certain condition of risks or uncertainty. This report will
provide information relates to sources of finance with its advantages and
disadvantages. Further, description will be provided on the type of information which
needed to make economic decision related to entity.
MAIN BODY
To
The Managing director,
Dated: 23 March 2019
Subject: identification of different source of finance
This is to inform you that in order to cover the cost of new site, these are the
appropriate way by which business will able to generate financing.
1. Identifying the source of finance with its advantages and disadvantages
There are generally two sources of finance which include internal and external.
Internal sources of finance mainly develop for organisational activities by which entity
will able to create long term investment in order to avail money for the entity ( Horst,
2018). These are the sources of finance which generally easier to manage are not
much cost affordable. It includes five sources of finance which are as follows-
 Owner’s investment: This is the type of money which generally came from
the own saving of the owner. It is mainly in the form of start up capital which is
used by the owner when he/she setting up a business. That is why it is
considered as the long term source of finance. Its advantages and
disadvantages are as follows-
Advantages Disadvantages
This is the type of money which does
not need to be repaid.
There is a limit to such amount an
owner can invest.
In such amount owners did not have It is the process which requires lot of

to pay the interest amount (Melé,
Rosanas and Fontrodona, 2017).
statutory compliance and lots of other
expenses relates issues.
 Retained profits: This is considered as source of finance which is only
available for enterprises which has its operations for more than one year. It
generally gets used when profits made are invested back into the business.
Its advantages and disadvantages are as follows-
Advantages Disadvantages
This is the type of amount which does
not have to repay.
This type of amount is not available for
new start up of businesses.
Owner did not have to pay any
interest on such amount.
Entities not able to make enough profit
for investing back such amount.
 Sale of stock: This is the type of money which generally came from the
selling off unsold stock. Such amount also invests back for the business
operations.
advantages Disadvantages
This is considered as the quick way of
generating finance.
In order to sale stocks, business
needs to take a reduced price.
Through the sale of stock, it generally
reduces the costs which associated
with the holding them for business.
 Sale of fixed assets: This is the type of money which arises from the selling
of fixed assets (Pilbeam, 2018). Here, in this process business do not always
have surplus of fixed assets.
Advantages Disadvantages
This is the good way of generating
finance from the type of assets which
is no longer needed for the business
operations.
It is a slow method of raising finance.

External source of finance is considered as taking a new business partner or to issue
equity or bond for creating a long term obligation for business. Its source of finance
are as follows-
 Bank loan/Overdraft: This is the type of money which generally borrowed
with an agreed rate of interest for a specific period.
Advantages Disadvantages
This is a good process of budgeting
where set repayments get spread over
a period of time.
It is expensive method because of
interest charging.
 Share issue: This is considered as long term source of finance which is
mainly suitable for limited companies.
Advantages Disadvantages
Owner did not have to repay the
amount and there is not interest
payable.
Profit generally distributed among
shareholders of the entity in the form
of dividend (Frino, Hill and Chen,
2015).
 Leasing: This is the process of obtaining a assets for business without paying
a large lump sum amount.
Advantages Disadvantages
Business generally gets up to date
equipment for its operations.
It is an expensive method.
 Mortgage: This is the type of loan through which business property get
secured.
Advantages Disadvantages
Such property used in the process of
business operation through which
It is also an expensive method.

payment get spread over.
From:
Junior accountant
2. Describing information which needed to make informed economic decision with
regards to finance
Main role of business owner is to develop sound economic decision by which
there will be no hurdle in doing functions of the business and to achieve
organisational objectives (Cuervo-Cazurra, Nieto and Rodríguez, 2018). Thus, in
order to restructure business with the acquisition of cost, three financial reports
mainly help them to make sound business decision which is as follows-
The Balance sheet: This is the statement which generally contains a summary of
financial balances which include assets, liabilities and about equity of the entity.
Through this owner will able to decide financial capability of company in order to
handle the changing revenue.
The Income statement: Through such statement owner will able to analyse the
income and revenue which has been incurred by entity during a particulate period of
time (Wu and Wu, 2016). This will help owner to realise the performance of company
by listing of sales and expenses.
Cash flow: This statement help owner to analyse the inflows and outflows of cash
during a finite period of time. It is the process through which management will
analyse the movement of cash which through operating, financing and investing
activities (Wulandari and et.al., 2017).
Thus, in order to restructure business, owner must have to properly analyse
the finance capability of business, the amount of profit which has been obtained
through assets and liabilities by which existing business will get affected. Owners
must have to develop strategy through which existing business will generate profit at
that level by which investors gets attracted to invest amount of money in business
capital.

3. Describing information which need by finance provider
In order to get the funds from finance provider, entity must have to disclose
the financial statements by which they will able to develop sound economic decision
(Baboukardos and Rimmel, 2016).These are generally a group of people which is
known as investors, lenders, suppliers etc.
Investors generally relay on the financial statement of company where they
need to know about performance of investment in entity (11 users of accounting
information, 2019). They want information in order to analyse the profitability,
valuation and risk of their investment. They generally use accounting information in
order to determine whether investment is fitting well into their portfolio or not.
Lenders use accounting information regarding borrowers in order to analyse
their credit worthiness which means ability of company for paying back the amount of
loan. They only provide loan by analysing the ability of borrower for paying its
liabilities on time.
Suppliers also want accounting information in order to assess the credit
worthiness to its customer so that they will able to offer such gods and services on
credit to its customers (Collier, 2015). They provide funds only by analysing the good
health of the firm.
CONCLUSION
From the above report, it can be summarised that financing in every business
plays an important role in order to expand business operations. In this report,
description has been provided on the concept of finance to entity which wants to
restructure its business. Thus, it is suggested to entity that in order to get the fund up
to £10 billion pound, entity must have to disclose its financial statement to fund
provider so that by analysing the health of company they will easily invest their
money in business capital of entity.

REFERENCES
Books and Journals
Baboukardos, D. and Rimmel, G., 2016. Value relevance of accounting information
under an integrated reporting approach: A research note. Journal of Accounting
and Public policy. 35(4). pp.437-452.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Cuervo-Cazurra, A., Nieto, M.J. and Rodríguez, A., 2018. The impact of R&D
sources on new product development: Sources of funds and the diversity
versus control of knowledge debate. Long Range Planning. 51(5). pp.649-665.
Frino, A., Hill, A. and Chen, Z., 2015. Introduction to corporate finance. Pearson
Higher Education AU.
Horst, U., 2018. Introduction to Mathematical Finance.
Melé, D., Rosanas, J.M. and Fontrodona, J., 2017. Ethics in finance and accounting:
Editorial introduction. Journal of Business Ethics. 140(4). pp.609-613.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher
Education.
Wu, J., Si, S. and Wu, X., 2016. Entrepreneurial finance and innovation: Informal
debt as an empirical case. Strategic Entrepreneurship Journal. 10(3). pp.257-
273.
Wulandari, E and et.al., 2017. Access to finance from different finance provider
types: Farmer knowledge of the requirements. PloS one. 12(9). p.e0179285.
Online
11 users of accounting information. 2019. [Online]. Available through
<https://accounting-simplified.com/financial/introduction/users-of-accounting-
information.html>