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There is no escaping the fact that businesses need finance (funds), both in the short term, and long term, to expand, operate or just plain survive. A business represents, in many respects, a continuous flow of money in and out of the company in the form of income and expenditure. Expenditure can be classified as either Capital Expenditure, which includes the purchase of fixed assets and spending on items which are to held by the business in the long-term, and will be accounted for in the Balance Sheet, and Revenue Expenditure, which essentially relates to the purchase of goods and service which will or have already been consumed, in the day to day operations of the business.
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Its important that a business is aware and willing to tap every possible source of finance available, particularly at critical stages of the firms development. We can initially segment sources of finance into those internally available to the business, and those that are available externally.
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| Profit |
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The business can retain profit (after tax, interest and dividend payments have been deducted), to finance the businesses intended future expenditure. To find out more about profit and the calculation of retained profit, visit our article on the Trading and Profit & Loss Account. |
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| Depreciation |
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By deducting depreciation from profit, the business makes provision for the eventual replacement of worn-out machinery / plant. This can be seen as a further form of profit retention, and thus an internal source of finance. |
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| Sale of Assets |
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Companies may choose or be forced to sell-off assets of the business in order to raise finance. |
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It is normally the case, that internal sources of finance are not sufficient to fund the total current and future planned expenditure of a business, and therefore the business must look externally for potential sources of finance.
We can further segment Sources of Finance into those that address Short-Term Finance needs arising out of working capital requirements, Medium-Term Finance normally involving borrowing over a period greater than one year and less than five years, and Long-Term Finance capital required for a period of borrowing exceeding five years. In the following section we will consider external sources of short, medium and long-term finance.
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