INDUSTRIAL ECONOMICS CIA III : Tulshe Chowdhury, 1114378 B.A. Economics Hons. THE CHOICE OF FUNDING- INTERNAL vs. EXTERNAL The choice of funding is crucial for any industry or firm. Firms in general prefer raising finance from internal sources rather than external sources. Let us elaborately discuss the underlying advantages and disadvantages of raising money from internal and external sources Internal Finance Internal source of finance is when funds are raised from within the organisation. These include the owner’s capital which is the start-up capital or the additional capital, retained profits, income from the sale of stocks and sale of fixed assets and debt collection by the firm. Advantages • Easier to take risks It is easier to take risks with one’s own money. There are no obligations or no fear of loss of someone else’s assets. • Flexibility in using the funds Since it is the own money, there’s enough flexibility to use the funds according to the needs of the firms. The added advantage about this is, it does not have any interference of outsiders in the firm’s affairs, which usually happens in the case of external finance. There’s no control or pressure from the foreigners. • No pressure of increasing profits The additional cost of raising money internally is negligible. Therefore, there is no pressure to meet the cost of funding. The owners may be contented with satisfactory profit margins and don’t have to worry about earning more profit to meet any other expense related to funding. The other merits of internal funding include: • Doesn’t have to be re-paid • No interest payable • Quick way of raising finance Disadvantages The demerits of internal funding can be listed as below: • Surplus may not always be the case ... ... middle of paper ... ... this slows down delivery and hence the production process. These further result in a loss of revenue thereby causing a loss to the firm and degrading its financial position. • Over-Capitalization It is the reverse situation where funds are more than required. Here, initially, it brings in stability and growth for the firm, but eventually it leads to wastage and inefficiency. This may lead to low income capital ratio which reduces the rate of dividends and low dividends have unfavourable effect on the market value of shares. Therefore, external financing becomes expensive and they start looking for internal sources. The firm, in this case, can increase retained earnings, but that will also reduce the rate of dividends causing a loss to the firm. Thus, it’s a common practice for the firm to maintain some appropriate proportion between internal and external sources.
...ws the business to lease equipment used for farming and production. This use of financing allows Tassal to avoid a large loss of capital when purchasing equipment. Instead they are able to make periodic payments, which offer a distribution of funds rather than an initial large expenditure. Therefore Tassal is able to focus on its key activity of ensuring growth and a continued long term return for investors. By avoiding large expenditure of capital these funds can be kept, allowing for increased profits which directly affect the shareholders in the company.
How has MCI raised external funds in the past? How sensible have these decision been?
The pecking order theory suggests that firms have a particular preference order for capitalised to finance their businesses. Stewart Myers put forward the idea of pecking order theory in 1984 in which mangers will prefer to use retained earnings first and will issue new equity only as a last resort (Book Reference). Companies prioritize their sources of financing according to the principle of least effort, preferring to raise equity as a financing means of last resort. Wang & Lin (2010) how internal funds are used before debt and once thi...
They are legally investing their money from the accrued pre-need revenues. The fact that they are allowed to invest these revenues allows them to create more money...
Firms can grow internally or externally. However, not all firms have adequate resources and capabilities and thus look for partners. Studies showed that more than two-third companies depended on external growth (Hewitt 2005).
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Managerial accounting has changed over the years. Managerial accounting focuses on more than the financial aspect. We will be looking at how managerial accounting affects the business world today. Business also look to the economy, federal taxes, and the financial market so it can make the best decisions for their business.
...ther or mechanical or even customs delay. Customers were upset of these issues when they were expected to have on-time delivery of their shipments.
One problem anyone is going to have in just about any industry is the amount of inventory to keep at warehouses. If there is too much inventory, then high costs will become a problem and hurt your bottom line. At the other end, if you try to save too much money by keeping inventories dangerously low, it may create stock-outs. These can infuriate your clients
There are two main ways to raise money for a project, growing business, or startup company: debt financing and equity financing. Debt financing includes long-term loans, while equity financing is the process of raising capital through the sale of shares in an enterprise. It is essentially the sale of an ownership interest to raise funds for business purposes. Debt financing allows you to purchase assets before you earn the necessary funds, which can be a great way to pursue an aggressive growth strategy (especially if you have access to low interest rates). Items like mining equipment, buildings, machines, and equipment can all be obtained immediately once a loan is acquired.
This is money from outside the firms own resources. Internal Finance Make notes (with examples) on the following three (3) types of Internal Finance. · Retained Profit Once the business starts to generate sales it will hopefully make some profit. This provides a return on the investment on the business.
With available cash, you can weather the ups and downs in your business and your industry. You can take on temporary workers when you need them without scrambling to find the extra funds for payroll. You don't have to dip into your personal funds. Many small business owners dip into their personal funds when cash comes up short in the business.
Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.
Accounting aids the government and organisations in decision making for their financial stability. This numerical data helps solve real life problems and contributes to how the economy and businesses perform.
Loyal investors act as partnership; provide sustainable power of financial support, continuous development in new market, more benefit into the company, strong cash