MFRD LO 1.1 & 1.2: Analyzing Sources of Finance for Businesses

This report provides a comprehensive overview of various sources of finance available to businesses, catering to both new and existing enterprises. It identifies and explains different funding options, including share capital, retained earnings, bank loans, cash management, hire purchase, and leasing. For each source, the report discusses the advantages, disadvantages, and legal implications, offering insights into their suitability for different business scenarios. The document emphasizes the importance of selecting the most appropriate financial source based on the nature and size of the business to enhance organizational performance and profitability. It also touches upon short-term and long-term financing options, highlighting the need for careful decision-making to avoid unfavorable situations and optimize financial outcomes. The report concludes with a list of references used in compiling the information.

MFRD
LO 1.1 and 1.2

 Different sources of finance are present in business with the help
of which enterprise can easily satisfy its financial needs. Selecting
most appropriate financial source depends on the nature of
business, its size and type of operations being carried out in the
company
 Further, to avoid unfavourable situations appropriate sources are
adopted by the management which enhances organizational
performance in the market. Long and short/ medium term sources
are present in business but decision has to be taken which source
has to adopt which is cheap and can enhance profitability level
Information pack for new and existing businesses which Identifies the
sources of finance available to business

Share
capital
Retained
earnings
Bank
loan
Cash
manageme
nt
Different sources of
finance

 Share capital: It is regarded as one of the most effective source of finance
which usually every organization considers. In order to satisfy financial needs
business can issue equity shares in the market through which large number of
investors can be attracted. This source of finance is generally suitable for
businesses which are old and large. Companies which are operating on wider
platform can issue shares in the market and can easily raise additional funds
with the help of this
 Retained earnings: It is the next effective source of finance which business can
easily consider. Retained earnings are the amount saved by company in order to
meet any unforeseen contingency. This type of source can be easily considered
by large sized organizations that are having strong financial base and in turn this
can easily satisfy financial needs of the entity in the most efficient manner
 Bank loan: Taking loan from financial institutions also supports organization in
satisfying its financial needs and in turn acts as a development tool. Further,
various banks are present in the market who can provide loan to company at a
cheaper rate of interest. In order to satisfy financial needs, company can
compare interest rate of different banks and can obtain funds from specific
financial institution present in the market
Different sources of
finance

 Cash management: It is considered as an effective short term
source of finance where organization can manage its cash through
proper planning. Through this source organization can easily deal
with the situation of inadequacy of finance and this can be
favourable for business in every possible manner
 Hire purchase and leasing: Hire purchase is regarded as the
agreement in which owner of assets lets them on hire for regular
instalments paid by the hirer. This short term source of finance
can be easily considered by small and large businesses. When
leasing as a source of finance is adopted then assets can be
financed without actually having to buy them outright. On the
other hand, with the help of hire purchase firm can use an asset
for fixed period in return for regular payment
Short term sources of
finance

 Share capital: Main advantage of using this source in
business is that it is permanent source of capital which
allows business enterprise to satisfy its financial
requirement. Further, in case of ordinary shares business
enterprise has to pay dividend if there is a profit. On the
other hand, main disadvantage of using this source is that
dividends have to be paid to be shareholders in relation
with the shares purchased by them. One of the major legal
implications of this source of finance is that there is
restriction on authorized capital where it is not possible for
the company to issue more shares than authorized capital.
This source has dilution of ownership where some rights
are transferred to the investors of company along with
right to take decisions.
Implication of sources of finance

 Retained earnings: Main advantage of
using this source is that it is not required for
business to increase liability and there is no
need to pay interest. But on the other hand,
main disadvantage of using this source is that
it is not applicable in case of small
businesses. Retained earnings as a source of
finance has no legal implication as it is type
of internal source. Apart from this, condition
of bankruptcy is not applicable in case of
retained earnings as source of finance.
Contd.

 Bank loan: Main advantage of using bank loan as a
source of finance is that loan taken can be easily
procured; interest paid on bank loan is tax deductible
expenditure. On the other hand, main disadvantage of
using this source is that excess borrowing can lead to
decreased cash flow and some financial institutions
carry prepayment penalty. Legal implication of taking
bank loan is that it leads to bankruptcy as sometime it
is possible that organization may not be able to repay
the amount of loan taken which has adverse impact on
the enterprise. Further, dilution of ownership does not
take place in case of bank loan
Contd.

 Cash management: It is one of the most effective
internal sources of finance whose main advantage is
that it saves major expenses of the business and cash
can be managed with the support of management. On
the other hand, main disadvantage of this source is
that it becomes difficult to determine the most
effective way to manage cash within the organization.
There are no legal implications and dilution of
ownership control issues associated with this source.
Apart from this, in case of bankruptcy due to poor
cash management business will not be able to pay its
obligations and due to this aspect liquidity position of
enterprise can be badly affected
Contd.

 Hire purchase and leasing: Main advantage of
adopting hire purchase and leasing as source of
finance is that business can take benefit by utilizing
assets without purchasing it. Further, all the
responsibility linked with maintenance of assets is
done by the leasing company. On the other hand,
main disadvantage of using this source is that total
cost of leasing may exceed and it can be higher than
the purchase of asset. In case if organization is not
able to make payment for the assets acquired then it
leads to bankruptcy. Further, the legal implication of
this source is that ownership is not transferred and
organization is having right to use the assets
Contd.

 Burgess, C., 2007. Do hotel managers have sufficient financial skills to
help them manage their areas? International Journal of Contemporary
Hospitality Management. 19(3) .pp.188 – 200.
 Butters, J., 2004. Managing finances for a fulfilled Canadian
retirement. Leadership in Health Services. 17(1) .pp.12 – 18.
 Danso, A. and Adomako, S., 2014. The financing behaviour of firms
and financial crisis. Managerial Finance. 40(12) .pp.1159 – 1174.
 Vereker, J., 2002. Managing Resources for Development.
Commonwealth Secretariat.
 Weaver, M., 2012. Resource Management. Routledge.
REFERENCES

THANK YOU