Understanding Of Finance Within A Business Environment Finance Essay

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As we are aware, finance is the lifeblood of business or it can be said as the most important part of all the business enterprises. To understand finance, you need to know the entire business indeed. Finance can be used for various reasons like expanding the business, investing and purchasing fixed assets like land and building, machinery so on. In order to survive in this competitive world every organisation need to have a good strength of finance available to their business or else they will not be able to survive in this world. Hence, it is very important to select the correct sources of finance available to the company. Finance can be in two types’ external sources or internal sources.

Sources of Finance:

Finance are arranged from external sources or internal sources. A fund, which comes from outside the business, is External sources of finance. Here the business are getting loans from individuals or for example banks that do have business relations directly.

External finance examples are:

Overdraft facility from bank.

Getting Loans from building society or banks.

Selling the new shares for sales.

These types of finance are divided as Short term and Long term. Payback period for this Long-term finance will be longer. Long term has two main sources i.e. share capital & loan capital. Day-to-day businesses are being covered by short-term finance, its payback period will shorter, hence less risky for lenders which are bank overdraft, hire purchase, trade credit etc.

Long-term finance sources

Short-term finance sources

Shares

Debentures

Public deposits

Retained earnings

Loan from financial institution

Term loans from bank

Bank overdraft

Hire purchase

Trade credit

leasing

Cash inflows to a business Cash outflows from a business

(Revenue from sales, loans, Payment for raw materials, stock, interest, sales of assets etc, labour, insurance, rent, rates etc.)

Short term Sources of finance:

Short-term sources it is mostly used by the small business to cover their day-to-day running cost. The most important aspects of the entrepreneur or the venture are to satisfy the commercial credit, which is also known as creditworthiness in order to be granted for any short term financing in the business. Eventually there are few aspects of short-term sources like Overdraft, Trade creditors etc.

1. Bank Overdraft facilities – Most of the business use this type of facility as it is short-term finance and when no longer required it can be paid back easily. Interest is charged only on the amount overdrawn so it is quiet cheap.

2. Trade credit – Trade Credit is a period given to a business to pay for goods that they have received. It is often 28 days and 90 days but some businesses might not pay for 6 months and on some occasions even a year after they have received goods.

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