CAPITAL FOR A PROFIT ORGANIZATION - Term Paper Example

Capital for a Profit Organization Capital for a Profit Organization The existence of any given profitable organization depends on the amount of capital accumulated to fund the diverse business operations. Lack of having enough capital to finance the various business activities contributes to the failure of most profitable organizations. In all situations, adequate capital is vital in commencing a business organization, boost operations during a financial crisis and payment of employees (Chakravorty, 2013).

In the current developed world, various sources of capital exist hence providing an ideal environment for the establishment and development of profitable companies. The chief sources of capital for any given profitable organizations are debt and equity financing; which accounts for almost 40 percent of all the existing companies in the entire world. In most cases, profitable organizations will always dwell on the external sources of money during a financial crisis. Debt financing refers to the situation whereby the profitable organization decides to borrow money and use it to finance the several business projects and departments.

The best examples of the debt financing available for the profitable organization entail of the banks, government guaranteed loans and financing companies (Coleman, 2008). In most cases, the profitable company will refund the money with interest. The interest depends on the amount of capital borrowed and duration of payment. The agreement between the lender and the management of the profitable organization determines the rate of payment of debt. However, in the case of equity financing, the profitable company acquires capital from the money that owners and stakeholders invest in the business.

Most of the profitable companies will always utilize the money obtained from owners and stakeholders before borrowing. In such a case, borrowing of the money will only occur if the money from the owners is not enough. In some situations, well-developed profitable organizations might choose to sell a portion of the company to investors in exchange for capital. In today’s world, most profitable companies sell shares to the public to raise necessary funds to aid in running the business. Other sources of capital for the profitable businesses entail of the internal sources of money, which originate from operations in the companies.

According to Mayover (2009, p. 127), a positive operating income originates from the business activities undertaken hence yielding profitable returns. The amount of money that the profitable organization gains as profit might act as income for other capital needs. However, it is almost impossible for small business to generate enough profit needed to finance the entire operations in the firm (Coleman, 2008). Mature profitable companies might decide to sell older and unneeded assets to make extra money than small business with few assets.

In situations that the assets have little or no book value, the company might gain enough money from the sale thus contribute to extra income. Small and developing profitable companies might not have the option of selling its assets. However, it is essential that the management of the profitable organizations identify the advantages and disadvantages of each of the sources of capital. The advantage of the external sources of capital is that both banks and financing organizations will provide immediate financial assistance whenever needed.

The disadvantage of the external source of finance is the high interest rates when paying the debt (Sumner, 2008). The advantage of the internal source of capital such as positive operating income is that the company uses its own money for business operations. The disadvantage is that selling assets in most cases contribute to incur losses. ReferencesChakravorty, S. (2013). Capital source and the location of industrial investment: A tale of divergence from post-reform india. Journal of International Development, 15(3), 365.

Retrieved from http://search.proquest.com/docview/214910891?accountid=45049Coleman, S. (2008). The determinants of capital structure in small firms: New evidence from the 2003 survey of small business finance. Paper presented at the 1-28. Retrieved from http://search.proquest.com/docview/192410312?accountid=45049 Mayover, S. J. (2009). Public venture capital: Sources of government funding for technology entrepreneurs. Library Journal, 127(2), 111. Retrieved from http://search.proquest.

com/docview/196811946?accountid=45049Sumner, C. (2008). Sources of finance: Eddie stobart ltd. Teaching Business & Economics, 12(2), 12-13. Retrieved from http://search.proquest.com/docview/231182437?accountid=45049