All businesses need to raise finance to run a business

Jun 27th, 2015
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Abilene Christian University
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Factors to consider before opting for a specific type of finance:  Size of the business  Purpose for which the finance is needed (e.g solving a short term cash flow problem will not require the same source of funding as for an expansion plan)  Amount required  Time scale (long term, medium term or short term) Difference between Capital Expenditure and Revenue Expenditure Capital Expenditure: Spending on the purchase of fixed assets Revenue Expenditure: Spending on the day to day running of a business

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SOURCESOFLONG-TERM FINANCEIntroduction The long-term investment decisions of a firminvolve the acquisition of long-term /fixed assets.They have to be financed with long-term sources offinance. The mean sources of long-term finance fallinto two broad groups: (i) Internal and (ii)External. The internal sources of long-term funds arenormally used to replace the concerned assets. Ina way, therefore, the only internal source offinancing expansion / growth / diversification forsuch companies are retained earnings.Internal Source: Retained Earnings As a source of long-term finance, retained earnings have somecommendable features. They are readily available to the firm.Flotation / issue costs and losses on account of under pricingassociated with external equity are avoided / eliminated. Thereis no dilution of control of the firm by the existingshareholders. However, the magnitude of financing throughretained earnings may by limited and variable / unstable /fluctuating primarily as a result of the quantum and variabilityof profits after taxes. It has, moreover, high opportunity cost interms of dividends foregone by the shareholders. Thus, retained earnings have both positive and negativeattributes from the viewpoint of the firm as well as theshareholders / investors and should be employed with caution.External Sources of FinanceThe external sources of long-term fundscomprise of equity capital,term loans,debentures / no

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