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There are many sources of finance for businesses and each of these sources has its own
advantage and disadvantage. No one source of finance is going to be appropriate; depending
on the circumstances only can a business decide as to what type of source for finance it is
going to make use of. For a business to be able to select the best type of source for them, it
needs to evaluate the various sources available and according to the evaluation base their
decision on it. There are two main types of sources for finance is internal and external sources
which are discussed.
All businesses need short-term finance from the very beginning to start up the business and to
cover day-to-day running costs. This provides the business with working capital. However
businesses also need long-term capital to help them to grow and expand, and this is paid back
over a number of years. Without finance a business would find it difficult to accomplish anything,
for example someone who decided to start up a shop would need finance at first to just buy the
shop and the stock. Even a window cleaner would need finance to buy equipment such as
ladders and buckets. But this can be taken onto a larger scale, as all businesses need finance
at some point. Different sources of finance External Sources of Finance This source of finance
comes from outside the business and involves the business owing money to an outside
individual(s) or companies. Personal Savings is an example of external sources of finance; this
mainly applies to sole traders, partnerships and small private companies. Owners may use
some of their own money as capital to invest in the business. Usually this option is used by the
person(s) who will be running the business as it is a cheaper option than trying to get a loan
from the bank. The downside being that if the business does not succeed then the person(s) will
lose everything. This is considered an external source as it is assumed that the money lent to
the business will eventually be paid back to the private individual, sometimes with an extra
amount to compensate the individual for the loan of the capital.
The company can face greater public regulation, accountability, scrutiny; the company will also
be exposing to a wider circle of investors with exacting requirement. Depending on the reason
for business financial troubles, bankruptcy can be a positive turn for the business. It can give the
business room to breathe and move forward.
Deferred ordinary shares, these are a form of ordinary shares, which are entitled to a dividend.
A dividend is paid through the profits the company has made over the financial year. Usually the
dividend is split into two payments over the following financial year. Ordinary shareholders can

help the business by funding the company through: The purchase of new shares, receiving
fewer dividends, which allow more profit to be reinvested into the business. By retaining more of
the company's yearend profits, which would have usually been paid out in dividend to share
holders, it can be used as a source of extra investment for the business. Although this method
may not provide enough funds it can help the business out if the companys cash flow does not
start well they will still be able to pay any suppliers on time. Through the issue of new shares
(dependant on the amount raised) the company could use the extra capital gained to expand
the business through the acquisition of development land, property or buying out another
company. Interest and bond and other debt are an expense of a corporation. But, the interest
expense will reduce the corporations net income and tax. Dividend on the other hand. If a
company makes a profit, it is its duty to share them with the shareholder of the company.
Opportunity cost is simple giving up something to achieve something else. For example, if a
person wants to open a new business and want to go to college but there are not enough funds
to cover both, he or she will have to give up one of his or her dream to achieve the other.
In concluding, there are various sources of finance from where a firm can acquire capital for
financing their business activities and meet long term obligations.

Lo2

Finance cost are referred to as interest cost, but are usually refer to as interest expense on
short term and long term borrowings of a company. For example, a bank overdraft and notes
payable. Different types of costs and how they appear in the financial statement are discussed.
Finance cost includes elements such as amortization of discount or premium that are related to
the company borrowings and finance charges on finance leases. There are two accounting
treatments for finance cost under IAS 23 borrowing cost. There are three main types of financial
statement are the balance sheets, the cash flow and the fund flow statements, the income
statements. a balance sheet is a statement of the total assets and liabilities of an organization. It
is categorize in two parts; statement of fixed asset, current asset and the liability and statement
showing how the net assets have been financed. Therefore, financial planning must be
proactive in every business.
Financial planning in business is designed to forecast future financial result. Financial planning
is simply the process of identifying wealth accusation and protection goals and developing a
coordinated plan to help prioritize your future financial decisions. Financial planning should be
taken as seriously as a medical prescription, as it deals with your financial health. It should be
seen not just as a means of achieving financial security, but as making a vital contribution to our
overall happiness and peace of mind. Financial planning can be manageable or overwhelming,
depending on how you approach it. Without guidance, its hard to know what you need and
when you need it. With the right information, tools and timeline, the choices become much
easier.
On the other hand, there are several types of budget that can be use in financial planning of
future forecast of an organization. A cash budget is an accounting device that is used to
effectively monitor and manage the immediate cash flow of the business. Moreover, overtrading
or under capitalisation can rises if the company has small capital to support their level of
activities. Liquidity may also arise as an overtrading of the company if there is insufficient capital
to meet its liabilities. Therefore, there must be enough information provided to managers to
reduce the risk of all overtrading activities.
Decision making involves the selection of a course of action from two or more alternatives in
order to arrive at a solution for a given problem. Decision making process require information of
both financial and non financial information because managers should be aware that there is a
problem, identify alternative solutions, then arrange for data collection of relevant data before

selecting a course of action. The cost that is use for decision making are called relevant cost. It
comprises of future cost, incremental cost, sunk cost and so forth.
In concluding, Management of finance and resources can provide a strong assistance for the
company in making the effective decision. The company can acquire finance from the various
sources that are available in the market and effectively use those finance in making investment
into new projects, or expanding the business or for buying some sort of assets for making the
business to run

Lo3

Budgets are important management process for planning and controlling. A budget is use to
forecast the financial result of a company financial position. Businesses should use budgets to
help monitor inflow and outflow of cash in the company. Investment appraisal techniques and
unit cost are discussed.
There are several types of budget that are use by organizations to help in their operations
activities. Master budget is a pro forma financial statement. It summarizes all the planned
activities of all subunits. These information are comprises of detailed schedules and financial
statements. The flexi budget is a performance evaluation tool; it cannot be prepared before the
end of the period, while a cash budget is comprised of two main areas, which are sources of
cash and uses of cash. The input of the cash budget also comes from several other budgets.
The results of the cash budget are used in the financing budget which itemizes investment,
debt, interest income and expenses.
On the other hand, investment appraisal is a key area in most businesses because the decision
pertaining to capital expenditure works with the strategic planning for the success of the
business. The payback period represents the amount of time the business will take to recover
its initial cost of investment. The accounting rate of return on investment is the average profit
from the investment divided by the average investment. Nonetheless, the accounting rate of
return is sometimes used as a capital budgeting method for determining whether or not the
business should proceed with the project. The net present value of a particular project
represents the increase or decrease in wealth that the project will generate for the investing
business. The internal rate of return is best described as the discount rate at which a set of cash
flow have a zero net present value. However, the use of the internal rate of return can be
problematic when finance costs are changing from year to year.
Nonetheless, manager will have to make decisions that govern how the company reaches its
goals. The level of cost in such decision has a great impact on the finances of the business. The
unit cost is the cost incurred by a company to produce, store and sell one unit of a particular
product. The unit cost includes all fixed cost and variable cost. A sensitivity analysis is a useful
tool which can help managers to make effective decisions about unit cost because it tells the
model user how dependent the output value is on each input.

In concluding, businesses can improve their forecasting capabilities to strengthen budgetary

control to avoid under spends not being identified early enough to reallocate resources to other
priorities.
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Financial statements are statements that represent a formal record of the financial activities of
an organization. Different types of business and their financial statement are discussed.
Different kind of business uses different types of financial statements. For sole traders, the
financial statements can be very simple as the report or statements are just for serving the
owner of the company. For a partnership, the financial statements are considered very crucial
as all the joining partners wants to the outcome of the company as they have contributed their
money for forming the partnership firm. The balance sheet, profit and loss account and income
and outcome statements are prepared by the firm to know the performance of the business.
With every financial transaction there are two accounting entries, a debit and a credit entry. The
ledger accounts of a business are the main source of information used to prepare these
financial statement. Ledger accounts are kept in a way which allows the two sided nature of the
transaction to be recorded. This is known as double entry bookkeeping. At suitable intervals, the
entries in each ledger account are totaled and balance off. These balances are collected in the
trial balance which is the use to prepare the financial statements such as income statement and
statement of financial position. This financial statement can be use to compare against other
companies. To compare them a ratio analysis can be use to compare a company financial
performance against industry average.
Ratio analysis is a tool that has many features. There are several ratios that can be used,
however they can be categorized in three main areas; profitability, liquidity and efficiency.
Profitability ratios consist of three rations: return on capital employed (ROCE), return on sales
(ROS) and gross margin. Liquidity ratio consists of two rations: current ratio and acid test ratio
otherwise called quick ratio. While efficiency ratio contains stock turnover, debtor turnover and
creditor turnover. These ratios can be express in percentage and days etc.
In concluding, the financial performance of a company can explain using a variety of measures.
By using ratio analysis. Ratio analysis can be regarded as a technique used in the financial
statement analysis. It gives an insight in to the performance of an enterprise.