sources of finance
Sources of finance
Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.
Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets that are no longer really needed to free up cash.
External sources of finance are found outside the business. For example from creditors or banks.
Internal sources of finance
Retained profit
Profits generated by a company that are not distributed to shareholders as dividends but are either reinvested in the business or kept as a reserve for specific objectives such as to pay off a debt or purchase a capital asset. Retained Profit Advantages:
Ready Availability: Being an internal source, these earnings are readly available to the management and directors don 't have to ask outsiders for finance. Cheaper than Extermal Equity: Retained Profit is cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. No Ownership Dilution: Relying on Retained Profit eliminates the fear of ownership dilution and loss of control by the existing shareholders. Positive Connotation: Retained Profits carry positive conotation as compared to equity issue as far as stock market is concerned. Disadvantages of Retained Profit: Limited Finance. The amount which can be raised by way of Retained Profit will be limited to an extent only. Keeping in view a stable dividend policy, the directors can 't exhaust the whole balance retained. As a result, the variability of profit after tax is substantially transmitted to retained earnings. High Opportunity Cost. The Retained Profit is nothing but sacrifice of profits made by equity shareholders. In other words, Retained Profit is dividend foregone by equity shareholders. This sacrifice
Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.
Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets that are no longer really needed to free up cash.
External sources of finance are found outside the business. For example from creditors or banks.
Internal sources of finance
Retained profit
Profits generated by a company that are not distributed to shareholders as dividends but are either reinvested in the business or kept as a reserve for specific objectives such as to pay off a debt or purchase a capital asset. Retained Profit Advantages:
Ready Availability: Being an internal source, these earnings are readly available to the management and directors don 't have to ask outsiders for finance. Cheaper than Extermal Equity: Retained Profit is cheaper than external equity because the floatation costs, brokerage costs, underwriting commission are other issue expenses are eliminated. No Ownership Dilution: Relying on Retained Profit eliminates the fear of ownership dilution and loss of control by the existing shareholders. Positive Connotation: Retained Profits carry positive conotation as compared to equity issue as far as stock market is concerned. Disadvantages of Retained Profit: Limited Finance. The amount which can be raised by way of Retained Profit will be limited to an extent only. Keeping in view a stable dividend policy, the directors can 't exhaust the whole balance retained. As a result, the variability of profit after tax is substantially transmitted to retained earnings. High Opportunity Cost. The Retained Profit is nothing but sacrifice of profits made by equity shareholders. In other words, Retained Profit is dividend foregone by equity shareholders. This sacrifice