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POST 1
Describe how organizations determine the need for external financing? As an administrator what would be your strategy in obtaining that funding? Would it be better to use internal sources of funding?
One of the advantages of external funding is it allows you to use internal financial resources for other purposes. If you can find an investment that has a higher interest rate than the bank loan your company just secured, it makes sense to preserve your own resources and put your money into that investment, using the external financing for business operations. You can also set aside your internal financial resources for cash payments to vendors, which can help improve your company's credit rating.
Growth
Part of the reason organizations use external funding is it allows them to finance growth projects the company could not fund on its own. For example, if your business is growing to the point that you need additional manufacturing space to keep pace with demand, external financing can help you get the funding you need to build your addition. External funding can also be used for making large capital equipment purchases to facilitate growth that the company cannot afford on its own.
Ownership
Some sources of external financing, such as investors and shareholders, require you to give up a portion of the ownership in your company in exchange for the funding. You may get that large influx of cash you need to launch your new product, but part of the financing agreement is the investor is allowed to vote on company decisions. This can compromise the vision you originally had for your company when you founded it.
Interest
External funding sources require a return on their investment. Banks will add interest to a business loan, and investors will ask for a rate of return in the investment agreement. Interest adds to the overall cost of the investment and can make your external funding more of a financial burden than you had originally planned.
External financing can take the shape of two different types of financing, debt or equity. Debt financing includes bank loans where a company gets financed by issuing debentures which they have to pay back after a certain period of time. It is called debt financing because the company is in debt to the bond holders and if they were go bankrupt, the bond holders would have claim to any remaining assets. In this case these are secured business loans.
Equity financing is when a company decides to give up ownership in the company to raise funds. This is usually done by selling company stock to investors through an underwriter (investment bank) or with no middle man (DPO). Sometimes this could include seeking out angel investors or venture capitalists. If you are expecting to get external financing through equity financing make sure that your business has a product or service that is unique, and that there is a high demand for your product or service. Most venture capital investors or even angel investors will not look at an offer unless they see a large growth potential.
Both forms of financing have their positives and negatives so it is really up to the owners to decide which type of financing to use. One of the main things that an owner of a business should consider is how much ownership they actually feel comfortable with giving up. Often times when an investor puts money into a business they will want to have a lot of say into what happens, so make sure you are comfortable before pursuing that capital (External financing, 2007).
As an administrator my strategy for gaining external funding would be to seek the advice of a trained financial advisor. I would use internal funding if it were available but if I needed external funding to grow the business. I would weigh the cost of ownership that I may have to give up and the interest that I would have to pay and compare it to the benefit of growing to company before I made that decision and my answer would also consider the advice of the financial advisor.
Reference:
Root, G. (n.d.) Advantages and Disadvantages of external finacing Retrieved from: http://smallbusiness.chron.com/advantages-disadvantages-external-financing-10033.html
POST 2
All organizations require a sufficient level of capital. Working capital is utilized by an organization to invest in the current assets that the organization operates on a day-to-day basis. Organizations have multiple ways of raising finance that can be suitable based on the characteristics of the organization, the nature of the investment and the economic environment (Henley, 2013). There are two main types of financing options that include internal and external sources of financing.
Internal sources of finance can include profits, credit control, reduce inventories and delaying trade payables (Henley, 2013).
Profits
Organizations can increase their funds by retaining profits and most big organizations retain 50% of their profits to fund expansion (Henley, 2013).
Credit control
An organization can also increase their cash asset by decreasing working capital items and chasing trade receivables owed by credit customers in order to release funds that can be invested back into the organization (Henley, 2013).
Reduce inventories
An organization can also reduce inventories and the subsequent storage costs (Henley, 2013).
Delaying trade payables
Lastly, an organization can extend the period before they have the pay their credit payments (Henley, 2013).
External sources of finance include ordinary shares, preference shares, bank overdraft, term loan, finance lease, operating lease and many other forms of financing (Henley, 2013).
Ordinary shares
Organizations can raise capital by selling stock in their business (Henley, 2013).
Preference shares
Similar to ordinary shares, preference shareholders will receive dividends before individuals with ordinary shares (Henley, 2013).
Bank overdraft
Organizations can access funds by maintaining a negative balance on its bank account. This allows for flex ability, competitive interest rate and can become a long-term source of finance (Henley, 2013).
Term loan
Financial institutions can also provide an organization with loans that have a negotiable rate of interest, repayment date and required security (Henley, 2013).
As an administrator, one would utilize external sources of funding in order to finance expansion projects. External sources of financing allow the organization to preserve their resources (Root, 2011). It also allows the organization to set aside internal finance resources for cash payments to vendors and improving the organization’s credit rating. External financing also allows for the funding of gross projects that the organization cannot fund on its own (Root, 2011). It allows for large capital purchases that are required to facilitate growth that cannot be funded by the organization on its own. Some sources of external financing such as investors and shareholders will require to give up a portion of the ownership in the organization in exchange for the funding (Root, 2011). This can become a problem as an investor is allowed to vote on company decisions and can compromise the vision that the organization originally had when it was founded (Root, 2011). External funding sources can also require a return on their investment. This is usually in the form of interest and that adds to the overall cost of the investment making external funding a burden if not planned accordingly (Root, 2011).
If the organization is large enough to be able to internally funded a project, then, it would be more economical to utilize the internal funds. However, if an organization needs to funding, they are most likely low on internal funding options. Internal sources of funding are a short-term solution that should only be exploited for low importance projects that do not demand a significant investment (Green, 2011).
References:
Henley (2013). Financing a business: internal and external financing options | Henley Business Review. Retrieved from https://henleybusinessreview.wordpress.com/2013/04/29/financing-a-business-internal-and-external-financing-options/
Root (2011). The Advantages & Disadvantages of External Financing | Chron.com. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-external-financing-10033.html
Green (2011). Internal and External Sources of Finance ~ Helping Bloggers, Helping Students – Ask Will Online. Retrieved from http://www.askwillonline.com/2011/04/internal-and-external-sources-of.html
POST 3
Chapter 25 gives a very general overview of financial accounting After reading the chapter discuss what areas you feel are most important for a non-financial manager to have a good grasp of and why.
Financial management is a crucial aspect of any thriving business. Profit maximization, or stockholder wealth maximization, are two real concerns for any organization – and they depend on solid financial decisions. To make good decisions, management needs good information. And that information comes from the accounting system.
From the accounting system come the financial statements. These statements contain important information about the organization's operating results. This information is important for effective management, and financial control. As a manager, or any other person with financial responsibility, you have to be able to interpret this information yourself.
Financial statements contain important information about your company's operating results and financial position. The relationship between certain items of financial data can be used to identify areas where your firm excels and, more importantly, where there are opportunities for improvement. Using, understanding, and interpreting these statements will help you make much better business decisions.
Accounting is a language unto itself. To become perfectly fluent takes a great deal of training and experience. Thankfully, non-financial managers, and other employees with financial responsibility, can learn to be conversant with the key terminology. The bookkeeping process is how day-to-day transactions are recorded. Balances in the various accounts are tracked and summarized in the financial statements. The financial statements bring the cycle full circle as they reflect the changes that happened during the accounting period. By understanding this cycle, you have a much better appreciation for the numbers on the financial statements, and you can use them to make sound managerial decisions (Understanding accounts…n.d.).
New business leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business (McNamara, n.d.).
References:
n.a. (n.d.) Understanding accounts basic finance for non-financial managers Retrieved from https://www.mindtools.com/pages/article/newCDV_45.htm
Macnamara, C. (n.d.) All about financial management in business. Retrieved from http://managementhelp.org/businessfinance/
POST 4
It is important for nonfinancial managers and physicians to have a working knowledge of accounting due to the fact that allows them to understand how they relate to an organization’s profitability, solvency, liquidity and the analysis of financial statements will help them communicate more effectively with financial managers (Marshall, 2015). It also allows them to explore sources and cost of capital in order to make investment decisions and evaluate the impact of those decisions on the value drivers of the organization (Marshall, 2015).
Working knowledge of accounting allows an individual to gain competence and confidence in the interaction with financial colleagues and senior executives (Marshall, 2015). It also allows a nonfinancial manager to control the flow of money through various departments in the organization. It also allows for them to understand the budgeting process and forecasting techniques that allocate financial resources (L.E., 2015). It also allows for a thorough assessment of the financial performance and health of the organization (L.E., 2015). Understanding fundamental finance management theory will allow an individual to apply this knowledge to analysis of a practical situation in order to find solutions and tackle work-related challenges that depend on finances (L.E., 2015).
A nonfinance manager should have a good grasp of the basics of financial statements. They should also be able to evaluate financial performance measurements that will help them in making decisions that at the highest value to the organization (NSU, 2016). Accounting is the most important aspect of any successful organization. It records all profits, credits, debts and losses and allows one to understand the state of the organization in numbers. Financial accounting provides vital information that helps one understand how the organization grows, makes money and where the profits are invested. Accounting defines the practice of objectively measuring and reporting on a summary of an individual organization’s financial transactions. Essentially it is a process of producing timely, accurate and understandable information about the organization’s finances (UC, 2016). Physicians must be able to understand basic finance accounting due to the fact that their decisions have an impact on the organization finances. This in turn leads to an impact on the physician themselves due to the fact that the organization makes decisions based on financial accounting. These decisions are related to the physician and their work operations and are intended to lead to a more favorable financial outcome for the organization.
References:
L.E. (2015). Accounting and Finance for Non Financial Managers training course – Joburg, Pre-Midrand, Sandton, Johannesburg, South Africa. Retrieved fromhttps://www.leadingtraining.co.za/accountingandfinancefornonfinancialmanagers_training_course
Marshall (2015). Understanding Finance and Accounting for Non-Financial Managers Online | Executive Education | USC Marshall School of Business. Retrieved fromhttps://www.marshall.usc.edu/execed/programs/understanding-finance-and-accounting-non-financial-managers-online
NSU (2016). Accounting and Finance for Non-Financial Managers. Retrieved fromhttps://secure.business.nova.edu/ExecEd/finance-and-accounting/non-financial-managers.cfm
UC (2016). The Importance of Understanding Accounting | Universal Class. Retrieved from https://www.universalclass.com/articles/business/accounting/the-importance-of-understanding-accounting.htm
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