Sources of Funds

Closely related to how money is used by a business is how it is obtained, i.e. the various sources of funds. Sources and application of funds are closely reiatedrbeeause-generally the most important factor in deciding the method of obtaining I the finance is the reason the finance is required. Sources of funds can also be summarized under two broad headings.

Internal Finance. This refers to the money a business generates from its own assets. Internal finance can be obtained - from the following sources:

1. Careful management of the business's income and expenditure. This is known as the cash flow of the business. It needs to be carefully monitoredto ensure there is enough money flowing into the business to meetcurrent commitments.

2. The profits from the previous trading activities of the : business. Some of the profits will be distributed to the owners of the business as a return on their investment.However, it is usual to reinvest part of the profits in order to allow the ^business to expand. Reinvestmentis a very important source of finance for capital expenditures.

3. The sale of the business's assets. Often the finance required for new assets can be partly obtained by selling older equipment. The business may also sell assets to a third party under an agreement, which allows the assets to be retained in return foran agreed rental. This sale and lease backgenerates finance for the purchase of new assets at the cost of increasing the business's current expenditure.

External Finance.External finance refers to the injection of fundsfrom outside the business. Essentially this type of finance can be obtained from two sources.

1. Borrowingmoney. All businesses borrow in order to finance a whole range of business activity. Materials can be bought on credit to help finance current expenditure and loansare obtained from many sources to help purchase new assets.

2. Extending ownership. This means attracting finance from people outside the business who are prepared to invest in its future. However, in the long run the business will have to make enough profit to give a return on this investment or the investors are likely to wish to withdrawtheir money and invest it elsewhere.

Therefore, financial decisions are concerned with both sources of funds and the application of these funds. In larger businesses this financial planning and decision making is the responsibility of the Finance Department.

The staff employed in the Finance Department under the guidance of Finance Director are concerned with three principal tasks:

■ Monitoring when the money is coming in and going out.

■ Monitoring where it is coming from and going to.

■ Monitoring how much is following backwards and forwards.

These various tasks are carried out by Financial Accountants, Management Accountants, Financial Analysts, who are responsible for preparing the financial accountsof the business, budgetingand giving advice on the advisability of new investment proposals.

In order to undertake these functions effectively, accurate and up-to-date financial information is needed. Therefore the collection, presentation and evaluation financial data are central to the work of the department.

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THE FINANCIAL OBJECTIVES OF THE BUSINESS	\|	Dialogue No 1 (315 words)

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