sources of finances used by businesses Essay examples

Submitted By jackgaff95
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Pages: 16

Unit 1 Task 3a, 3b and 3c: Sources of Finance

I have chosen to write about the sources of finance for the Smithy Joinery Company which is an Ltd business which is based in Preston. Smithy Joinery is a specialist joinery company that does a wide range of mainly wood work jobs for customers.

There are two main sections that sources of finance can be divided into. These are Internal from within the business and External from means of outside influences.
Internal sources of finance, are financing a business through available sources of capital from within the business, this includes retained Profit.

Retain sources of finance______________________________________________________
A business that uses Retained sources of finance is Smithy Joinery, it can be the most important and significant source of finance for a business. The principle is simple when Smithy Joinery has made a profit; the owners choose to retain the money within the company bank account, it provides medium to long term source of finance. Additionally Smithy Joinery may choose to spend, invest, or give dividends and then keep the rest of the profit.
Advantages of retaining profits
• Hugely benefits Smithy Joinery as they have Self dependence; when they retain their profits it means they are more self-dependent and don’t have to rely on another company or government to support them.
• Retained profits enable Smithy Joinery to be very flexible, the management have complete control over how their money is reinvested, and what proportion is kept rather than paid as dividends. This is another massive benefit for Smithy Joinery as they have full control of their money.
• A quite good advantage I think of Smithy Joinery retaining its profits is they do not dilute the ownership of the company because if they didn’t retain profits they may use other forms of finance that may include selling percentages of their business therefore lessening their power in the company.

Disadvantages of retaining profits
• A rather bad disadvantage for Smithy Joinery having retained profits is more taxes as the business has more money, this can affect Smithy Joinery as taxes take a notable percentage of money, which could be used for generating more funds or dividends.
• A disadvantage that doesn’t really affect the performance of Smithy Joinery but may affect the satisfactions of its shareholders is that retaining profits is choosing to save money instead of paying the full amount of profits made back to the shareholders.
Analysis of retained profits for smithy joinery
I think that overall retained profit is a good way of financing smithy joinery although I believe that it will only work to a certain point. Smithy joinery retaining its profit gives the company many good advantages such as being self-dependent and having more control of what they do with their money, but why I think retained profit will only work to a certain point is largely because of government taxes, if smithy joinery have more money within their bank account to government can increase taxes on the business, so I believe that smithy joinery should retain its profits up to a certain amount in order for them to not lose money through taxes, but stills allows the business the benefits of having money in an account.

External sources of finance are obtaining funds that come from outside an organization. These are overdrafts, loans, Mortgage, Higher purchase, Leasing, Factoring, Share/equity capital and Venture capital.

An overdraft is a temporary additional funds added to a business`s bank account where they are able to be overdrawn in their account by a certain agreed amount between the business and their bank. Interest is charged on the based on the amount overdrawn and the length of time overdrawn, and are usually charged a