Business Finance: Functions, Sources, and Suitability Assignment Examples

Introduction

In this assignment, being the manager for the European market at GotoHolidays, I will explore the basic concepts of business finance. Specifically, this presentation will discuss the place of finance in business as a function, relationship between business and departments, and the types of funding. With these ideas in mind then we are assured of making some good stands in the company financially and in the long run and achieving the intended growth.

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Finance as business function

Finance as a business function entails the flow of funds and the running of cash and other financial resources in an organization. Another key component of management is specifically earmarked as targeting the use of monetary resources to facilitate organisational operations and attain business objectives. Finance plays a major role in establishing and managing liquidity, sourcing and acquiring funds, and the right proportion of total finance. Some of these are the management of cash, handling of the many investments, and the need to be profitable through controlling costs and generating income. It also entails assessing financial risks and returns in the decision-making process. Finance collaborates with other business units such as marketing, operations, and human resources to ensure that the financial tactics as well as goals in the firm are in order with the general organizational goals. In conclusion, the finance function guarantees the company’s availability of resources, ensuring its stable functioning, fulfilment of its obligations, and its development as part of the long-term strategy for success(Atrill and McLaney,2018).

Relationship with other business functions

Finance integrates itself with other business functions like marketing, operations, and human resources to optimize business processes and deliver business objectives. In marketing, finance is the one that approves the budget for campaigns and also determines their return on investment. For operations, finance disburses monies for the cost of production, stock, and supply chain management all in an efficient manner. Human resource salary structure, employee benefits, and training investments are controlled by finance in that department. Finance also plays the role of aiding strategic decisions based on data provided by such departments and monitoring the costs and the feasibility of projects. Due to interaction with all business activities, financial management plays a key role in coordinating the relations between organizational resources and business goals in terms of profitability and stability in the company’s activity. Such integration is essential for achieving the best result and fulfilling long-term objectives(Atrill and McLaney,2018).

The meaning of Internal and External sources of finance with examples

Internal sources of finance are those funds that are available with the business organization without going in for borrowings. These are Retained Earnings, Asset Sales, and Working Capital as far as the efficiency of cash flows together with the current assets is concerned. For instance, a firm applies its retained profits to diversify in its business.

Sources of finance external refer to situations where an organization looks for finance from other people or firms. These are such as getting a bank loan, floating shares, or getting venture capital. Some examples are acquiring a loan to fund a new project, or managing to sell some stock in exchange for cash from the buyers. External finance is one of the sources of finance that is mostly sought when internal sources are unable to cater to large capital projects.

Internal and external sources are very important for the provision of financial flexibility, growth, and achievement of business goals and objectives (Weetman,2019).

Benefits and limitations of five different sources of finance

1. Retained earnings enable the business to expand without borrowing but the source of funds is the profit earned and this may be slow.
2. Bank loans offer immediate funding and the same fixed amount of repayment, but come with conditions of assets put up for the loan and increase the cost with the interest rates.
3. Offering shares can attract large amounts of capital which does not require repayment, but its waters down the ownership interest and can result in a loss of management control.
4. Venture capital provides ample funding and experience for high growth, but it requires high returns and stock ownership, which minimizes the owner’s control.
5. Asset sales produce initial cash because of selling unused assets, but the firm constricts its future business operations as useful resources are let go(Brealey, 2019).

Why Businesses May Need to Use Different Sources of Finance

There could be various reasons why a business may be forced to seek other sources of finance other than the owner’s funds. Owner’s equity has generally limited amount of funds which may not be enough to cater to their large capital requirements where it is likely to be needed for instance in expansion or long-term investment. Money from external sources such as bank loans or equity financing, gives one access to bigger amounts, hence funding growth plans that would otherwise not be possible.

Further, the recall of a variety of funding sources reduces the probability of over-reliance on personal sources of funds by the owner. It also has flexibility; For instance, short-term financing is used to fulfil short-term needs whereas long-term financing is used for strategic needs. An advantage of obtaining funds from a combination of sources is that it avails cash flow management and is the most efficient means of sourcing cash that is appropriate for a business, balancing between expansion and capital liquidity (Moll,2019).

The suitability of these sources under possible scenarios

Different sources of finance are more suitable for a tourism company like “GotoHolidays” that is looking forward to expanding in the European market as indicated below. Retained earnings might be perfect if the company is consistent in its profit-making and does not want to engage in borrowing, but might not be enough for major expansion. They can easily source the required capital from the bank in anticipation of which attracts interest and requires collateral. It may also be useful for raising large sums for a new market, but it will lead to a dilution of current shareholders. Venture capital is suitable for growth and innovation needs but requires divestiture and high returns on investment. Essentially, there is the argument that through selling assets one could be able to get immediate funds but it would be at the cost of the organization’s capabilities. The decision to go for an agency or create an in-house Advertising Department has to do with the company’s financial situation, development plans, and capacity to take risks (Cheng, 2019).

Conclusion

In conclusion, the right source of finance for “GotoHolidays” depends on assessing the overall requirements for immediate needs and future strategies. Every source of funds has its own merits and demerits such as retained earnings, bank loans issuing shares, venture capital, and sale of assets. Considering these choices allows the company to make the best decisions about how to help fund its growth and not compromise its financial health in the process.

References

Atrill, P. and McLaney, E.J., 2018a. Financial accounting for decision makers. 9th ed. Harlow: Pearson.

Atrill, P. and McLaney, E.J., 2018b. Accounting and finance for non-specialists. 11th ed. Harlow: Pearson.

Brealey, R.A., Myers, S.C. and Allen, F., 2019. Principles of corporate finance. Journal of Finance, 74(1), pp.1-36.

Cheng, M. and Wong, K., 2019. Financing choices and firm performance: the role of capital structure in different economic conditions. Journal of Corporate Finance, 58, pp.217-235.

Moll, J., & Yadav, S. (2019). The Strategic Use of Financial Resources: A Review of Financing Strategies in Dynamic Markets. Journal of Business Finance & Accounting, 46(1-2), 32-58.

Weetman, P., 2019. Financial accounting. 8th ed. Harlow: Pearson.