As far as financing for a business is concerned, there are 6 sources of finance that enables a business to function in a defined manner. While the online businesses need very little fund to operate, the traditional business enterprises need a substantial investment in the form of capital (Atkinson, 2005). Some of the most common sources of funding or finance sources are;
While a large organisation could use a wider variety of sources to accumulate fund, a net enterprise however have minimal scope of raising fund. Investment by shareholders helps in business expansion, while bank loans assist in capital projects. Cashflow is a short term credit that is offered till the goods are sold. Finance cost is also known as ‘borrowing cost’ and it help the companies with financing respective operation with equity financing or borrowings and loan. These funds are accumulated on the basis of an interest charged against it. While the fund providers demand interest, the equity providers charge dividends and capital gains. Non-financial cost are those cost that are not directly in the organisation’s cash flow or present in the income statement for example, cost of non-efficient employees. Both financial and non-financial benefits are important in an organisation. So benefits could be measured quickly while some are difficult (Kim, 2009). For instance the projected positive financial expectations from the action for example, cost saving, profit increase etc.
Large business like Disney scoping houses could raise fund from various sources for example, fund from various institutions such as ICICI, NABARD, IDBI, MUTUAL FUNDS etc. Small business on the other hand collects fund from local sources such as friends, family etc.
Sources of finance are;
Equity share and term loans: the equity share is issue into the stock market. They offer a fixed dividend rate and the loan amount is generally paid in fixed number of instalments. The rate of interest is also fixed.
Retained earnings: in this type of earning the fund is raised from the business itself and hence it is absolutely free from interest. Profit is earned and it is reinvested in the business (Skibiński and Sipa, 2015).
Short and long term debts: these are the external sources of finance and there is a fixed rate of interest which has to be paid if it is considered. There is another source of financing and it is called capital leasing.
In organisations like Disney could however expand by collecting fund in a systematic manner. Cost of capital strictly refers to the scope of earning cost of making an investment. It is also known as the rate of return that has been earned by investment. It is the rate of return that engaged in persuading the investor in making the investment. Cost of capital is identified by the market and explores the degree of risk of investor. This option is selected for achieving high investment on return (Oshima, 2010).
Cost of capital is the cost that has to be paid by the company for debts and equity and funds accumulated for operation.it comprise of cost of debt, common stock as well as the preferred stock. There is a unique formula that should be followed at the same time. An example is given below to help understanding the situation better in connection to Disney (Atkinson, 2005).
Cost of capital is an important aspect of business and help in valuation of the work. Every investor looks for a high return on their investment. It is expected that the investment should grow by at least the cost of capital. It is determined by the market and also explores the expected risk level of the investor. When a choice is given between investment options such as equal risk, investors are likely to select the particular option that would help them gain high return on the investment (Fricke, n.d.).
For example, in the Disney scoping if the cost of investment is $50million and is expected to save and amount of $10 million every year for a period of 5 years. It is likely that there will be some level of risk associated with the situation. There could be risk from other sources and unplanned incidents hence they could invest in bonds and earn a percentage of return for example, 12% per year.
Atkinson, A. (2005). New sources of development finance. Oxford: Oxford University Press.
Fricke, E. (n.d.). Capital Investment and Stock Returns: An Alternative Test of Investment Frictions.SSRN Electronic Journal.
Kim, S. (2009). Learning from experts: collection development in business. Collection Building, 28(2), pp.62-67.
Oshima, K. (2010). Single capital, investment choices and preferential tax regimes. Papers in Regional Science, 89(3), pp.659-668.
Skibiński, A. and Sipa, M. (2015). Sources of Innovation of Small Businesses: Polish Perspective.Procedia Economics and Finance, 27, pp.429-437.
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