Business Financing Sources and Capital Management
Classification of Financing Sources
Financing sources are the liquid resources or means of payment available to a company to meet its cash needs. These are classified as follows:
By Repayment Plan
- Short term: Less than one year.
- Long term: More than one year.
By Source
- External: Social capital, lending, and operating funds.
- Internal: Undistributed profits, depreciation, and provisions.
By Financing Media
- Own: Capital and reserves.
- External (Alienated): Loans, credits, and borrowings of all kinds in the short or long term.
Own Resources and Internal Financing
Own resources (or financing of one's own) are the most stable resources available to the company and do not have to be repaid during its lifetime. They consist of:
- Capital: Formed by contributions from the partners.
- Reserves: These come from retained earnings and form part of internal self-financing.
Maintenance Funding
Maintenance funding is formed by depreciation and provisions:
- Depreciation: Calculated based on the value lost by assets during the production process.
- Provisions: These are also a result of the company creating a fund to deal with potential losses that have not yet occurred or future expenses.
External Financing and Debt Instruments
Dividends represent the fraction of a company's profits recognized for partners in return for the capital they have invested. Borrowings involve issuing debt securities by firms, which are purchased by individuals and other companies in exchange for interest.
Leasing and Renting
- Leasing (or lease): A financing system where a company incorporates fixed assets in exchange for a rental fee.
- Renting: Consists of rental property in the medium to long term. The lessee pays a fixed monthly income for a specified period, and the renting company is committed to providing a range of services.
Short-Term Financial Resources
Resources other than long-term include short-term loans and short-term bank credits:
- Overdraft account: The use of an amount exceeding the available balance of a checking account.
- Credit accounts: Used when a company wants financial means for possible needs but without specifying the exact quantity.
- Commercial Credit: Automatic financing obtained when a company delays payment to suppliers.
- Discounting: Client debts documented in letters can be transferred to a financial institution for an anticipated amount.
- Factoring: The sale of all credit rights of customers to a company called a "factor," providing immediate liquidity and also avoiding defaults.
- Spontaneous funds: Financing that does not require prior negotiation.
Present Value Calculation
The update process calculates the present capital value of a future amount using the formula: Co = Cn / (1 + i)^n.