In simple words, Finance is the management of money pertaining to organizations, companies, or government. It includes all the activities such as investing, borrowing, lending, savings, etc.
Finance spent on acquiring and the maintenance fixed assets. Fixed assets include Land, buildings, machinery, equipment, etc. that are not meant for resale but for the purpose of generation of revenue in the business.
Payments made to meet the regular/daily operational costs of a
business. Example- Wages, Rent, Salary, etc.
Finance/ Capital generated internally by the business which does not put any liability on the business’s head. There is no direct cost except for the opportunity cost.
PERSONAL FUNDS | RETAINED PROFITS | SALE OF ASSETS |
Funds employed by the owners at their personal level, from their savings. | The profits that are left after the payment of dividends (shareholders) and taxes (government). These are generally used for expansion and other future activities related to the growth of business. | Sometimes, businesses raise money from the sale of dormant assets, the assets that are no longer useful such as old machinery/ equipment. |
Leasing
Hire- purchase
Find the table drawn below for the better comprehension of the internal and external sources of finance by the timeframe and the type of organization.
Sources of finance | Short term | Medium term | Long term | Private limited company | Public limited company | Sole proprietorships and partnerships | NGOs |
Internal | |||||||
Personal funds | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
Retained earnings | ✔ | ✔ | ✔ | ✔ | ✔ | ||
Sale of assets | ✔ | ✔ | |||||
External | |||||||
Share capital | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
Loan capital | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
Overdrafts | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
Trade credit | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
Grants and subsidies | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ | |
Venture capital | ✔ | ✔ | ✔ | ✔ | ✔ | ||
Business angels | ✔ | ✔ | ✔ | ✔ | |||
Debt factoring | ✔ | ✔ | |||||
Leasing | ✔ |
The factors that influence the choice of source of finance in a business organization have been mentioned above. Those are the theoretical factors that influence the choice of source of finance. In practice, the CUEGIS (change, culture, ethics, globalization, innovation, and strategy) factors too have to be considered by the management before arriving at a final decision pertaining to the choice of feasible source of finance.