2. INTRODUCTION
One of the most important consideration for an
entrepreneur-company in implementing a new
project or undertaking expansion, diversification,
modernization and rehabilitation scheme is
ascertaining the cost of project and the means of
finance. There are several sources of finance/funds
available to any company. An effective appraisal
mechanism of various sources of funds available to a
company must be instituted in the company to
achieve its main objective.
3. Business enterprises need funds to meet their different types
of requirements. All the financial needs of a business may be
grouped into the following categories:
SOURCES OF
FINANCE
TYPE
INTERNAL EXTERNAL
TIME
LONG TERM SHORT TERM
MEDIUM
TERM
4. INTERNAL SOURCES OF
FINANCE
The various sources of internal finance for the business
includes:
Owner’s Investment
Retained Earnings
Sale of Stock
Sale of Fixed Assets
Utilizing Working Capital More Effectively
Debt Collection
5. RETAINED PROFITS
This is one of the most important internal sources of
business finance.
It represents the profits generated from sales after interest
payments to lenders, taxes to the government and
payments to shareholders in the form of dividends.
The remaining profit is then retained or put back into the
business and available for future spending by the
organization.
6. OWNER’S INVESTMENT
This source consists of money injected by the owners
themselves in their business.
This is an internal source of finance that can be in the
form of start-up capital – used when the business is
setting up – or in the form of additional capital – possibly
used for business’s expansion.
7. SALE OF STOCK
Purchase and storage costs use revenue that could
otherwise be used to expand the business.
However, when reducing inventories enterprises should
be careful to retain the capacity to meet future demand.
8. SALE OF FIXED ASSETS
Fixed assets are those that are not easily converted to
cash.
Typically, these assets include equipment, property and
factories. Because these assets take time to convert to
cash, they cannot be relied on for short-term access to
finance. If you have the time, however, you could, for
example sell off some equipment or even property to
invest in your business.
This is particularly useful if your needs have outgrown
some of your fixed assets. For example, if you need to
purchase a new equipment.
9. UTILIZING WORKING CAPITAL
MORE EFFECTIVELY
Working capital is money tied up in the business and used
to finance its day to day needs, such as buying raw
materials.
All businesses have a working capital cycle that identifies
how this money moves around the business.
A possible source of finance is squeezing or reducing our
own working capital needs.
Therefore the cash we need is more efficiently used.
Eg: If we minimize our stock levels we reduce the amount
of money tied up in stock.
10. DEBT COLLECTION
A debtor is someone who owes a business money.
A business can raise finance by collecting the money
owed to them (debts) from their debtors.
Not all businesses have debtors i.e. those who deal only in
cash.
11. FACTORS INFLUENCING SOURCES
OF FINANCE
Purpose - What the finance is to be used for?
Time Period - How long the finance will be needed for?
Amount - How much money the business needs?
Ownership and Size of the business
A business should match the source of finance to its
specific use – in practice this means that a business
should secure long-term sources of finance for long term
uses or needs and short term finance for immediate
needs.
The cost of the source
12. The organization’s objectives.
The flexibility and availability of the finance. For
example, how easy it is to switch from one form of
funding to another, or whether a particular form of
finance is available for a new business with no trading
record.
The impact the new funding would have on the
organizations current financial structure. For example, its
balance sheet.
The state of the external environment. For example the
economy and consumer trends.
The type of business structure it is. For example a sole
trader or partnership can raise funds from the stock
market.