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Principles of Financial Management - Assignment Example

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The organization needs to maintain and have a flow of finances that is quite steady in nature in order to pay for day to day operational activities and to…
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Principles of Financial Management
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Download file to see previous pages Funds for business operations can be obtained from two sources, these include: internal as well as external sources.
Internal sources of finance refer to funds raised from competencies and resources within the organization, for example: sale of fixed assets and money saved from the total earnings. External sources of finances refer to those sources that are located out of the business vicinity, in the environment in which the business is operating (Bendrey, 2001, p.16). For example: sale of shares to other investors, bank loans, overdraft and investments from the investment world. Several benefits are associated with both kinds of financing methods. External financing sources such as sale of shares is one of the most fastest method for raising capital and gaining huge amount of money in a very short period of time. Money raised through sale of shares does not need to be returned and no interest needs to be paid. On the other hand, funds raised through internal sources allow the organization to continue controlling the organization and is not associated with payment of interest. If loan is obtained from banks, organizations can gain access to heavy amount of funds which can be repaid over a long period of time and company does not losses its say on the operations.
These sources of finance have disadvantages associated with them, in case of sale of shares, owners of the company loose control and shareholders even participate in decision making process (Cottrell, 1980, p.248). If an organization borrows loan from a bank, it has a duty to not only repay the loan amount, it even has to pay the interest levied on the loan amount which might become difficult to repay if the organization fails to generate revenue. The money raised through internal sources are quite limited are required for day to day financing purposes. If money raised through internal sources is used up, the company might suffer from ...Download file to see next pagesRead More
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