Funding Sources & Financial Statements: A Business Guide

Posted on Apr 2, 2025 in Economy

Business Funding Sources

There are many sources of finance that a business can leverage to gain the required funding for expansion and other activities. These are broken up into three different categories:

Short Term Finance

  • Bank Overdraft: Overdrawing on an account, incurring interest charges based on the duration of the overdraft.
  • Short Term Loan: Borrowing a sum of money from a bank for a set period, with interest payable on top of the original sum.
  • Bill of Exchange: Similar to an IOU; suppliers can sell these to a bank for a reduced price.

Medium Term Finance

  • Medium Term Loan: Borrowing from a bank for a medium-term length. The full fee, plus interest, is repaid in monthly installments.
  • Leasing: Paying for the use of an asset over a specified term, instead of buying it outright.
  • Instalment Credit: Similar to hire purchase but for longer terms.

Long Term Finance

  • Long Term Loan: Similar to medium and short-term loans, but with more in-depth analysis of the business’s liquidity and profitability to determine repayment ability.
  • Debentures: Loans offered to companies at a fixed interest rate. Debenture holders are often sleeping partners and do not participate in the company’s activities, making them external sources.
  • Retained Finance: Profits kept back for business investment after all expenses are considered.
  • Shares (Preference and Ordinary): Similar to leasing, but for larger properties and assets used as collateral. This involves selling an asset and then leasing it back for use by the selling party.

Users of Financial Information

Users of financial information within an organization can be internal or external:

  • Internal: Management, Owners, Employees, Shareholders.
  • External: Potential Shareholders, Business Analysts, Government, Competition.

Key Financial Statements

Interested users of financial information will look for the following:

  • Income Statement: Contains information regarding the expenses and incomes of the business, used to calculate the net income for the year and determine profitability.
  • Statement of Changes in Equity: Calculates dividend payouts, especially important for PLC organizations. Allows stakeholders to assess investment potential.
  • Statement of Financial Position: Reports current and non-current assets and liabilities, providing insights into the business’s value based on assets and liabilities. Ideal for analysts and investors.
  • Directors Report: A summary produced by the board of directors, documenting shareholder payouts and overall activities.
  • Cash Flow Statements: Focuses on cash inflows and outflows over the financial year, highlighting spending and saving patterns.
  • Cash Budgets: An estimation of a business’s cash inflows and outflows during a financial year, assessing the business’s ability to cover costs and manage cash effectively.