Financial & Investment Areas: Sources, Costs & Characteristics

Posted on Oct 26, 2024 in Economy

ITEM 9: FINANCIAL AND INVESTMENT AREA

1. Sources of Financing for the Company

Means of funding sources or means liquid resources are available to pay the company to meet its cash needs. The company’s financial resources can be classified according to three different criteria:

Classification According to the Repayment of the Funding Source:

  • Sources of short-term financing: When the repayment period is less than a year. E.g., supplier credit, bank loans, etc.
  • Sources of long-term financing: When the repayment period is more than a year, e.g., long-term loans and borrowings.

Classification According to Whether a Source Outside the Company, or Have Been Generated Internally by Normal Activity:

  • Internal financing: Retained earnings (reserves) and redemption fees and supplies.
  • External financing: Social capital, loans, credits the company’s performance, etc.

Classification According to Whether the Financial Resources Belong to the Owners of the Company or Belong to People Outside the Company:

  • Financial resources themselves: As the capital and reserves.
  • External financial resources: Since the loans, credits, and loans of all kinds, whether short or long term.

Own Resources or Financing Their Own:

More stable resources are available to the company and have not been back on a lifetime of it. They are those who have more irrigation because, in bankruptcy, the members are the last to receive the share. The company’s own resources consist of:

  • Capital: This consists of the members’ contributions to the company’s incorporation and also by successive capital increases that may occur.
  • Reservations: They come from retained earnings by the company and part of its internal cash flow. Reservations can be of different types: legal, if the quantity is fixed by law, statutes, when they are set by the company’s studies, and voluntary but are determined by the extraordinary profits. Reservations are the benefits that remain in the company, with them you can make new investments and thus encourage growth. For this reason, reservations are also called self-financing of enrichment.

Funding for maintenance is made up of:

  • The depreciation is calculated by the value that is losing the assets in the production process. When just one fiscal year, an estimated loss of value that has occurred in the assets of the company and incorporates the value of the product as a cost rather than be charged in the amount of the sale. As the years pass, the sinking fund increases in the value of the assets have been deprecated.
  • The provisions are also part of the result of the company, which creates a fund to deal with certain losses that have not yet been produced, or future expenses. E.g., loss of securities.

Sinking funds and supplies, unlike stocks, do not represent growth for the company but are a self-financing maintenance. When the company reaches the end of the fiscal year, it gets a result of the activities to be undertaken. From this result, a portion goes to fund depreciation and provisions, the corporation tax on dividends (which is the fraction of the profits of a company or society which recognizes members and regular remuneration of capital invested) and reserves.

Financial Resources Outside the Medium to Long Term:

Long-term borrowed funds are those for which the company has for a period exceeding the duration of a financial year and, once past this time, given back with interest. Among the resources other medium and long term, are the following:

  • Loans medium and long term: The companies lose lending to credit institutions (banks, savings banks, credit unions, etc.) to be funded.
  • Borrowing: Are the claims (bonds, notes, etc.) emitted by companies and are purchased by individuals and other companies in exchange for interest. When companies need a lot of money and the loan terms offered them by financial intermediaries are not economically feasible, individuals borrow through the issuance of debentures and bonds.
  • The leasing or leasing: It is a funding scheme whereby the company can incorporate some element of fixed assets in exchange for a lease fee. This process involves three operators: the client company, you need a specific good, the company that makes or possesses good, and the leasing company. The leasing company is a financial institution that finances the acquisition of good and delivers it to the client company in return for rent. The duration of the operation leasing generally coincides with the economic vine heritage element. The main drawback of this method of funding is the high cost.
  • The renting: It is a modality that involves the rental of movable and immovable property in the medium and long term. In the leasing contract, the tenant agrees to pay a fixed monthly income for a specified period, and the leasing company is committed to providing a range of services: facilitating the use of the property during the contract period, performing maintenance good, and insurance against all risks.

Other Resources in the Short Term:

The company has also shortened term loans that allow you to finance part of their operating cycle. The sources of funding in the short term most used by companies are:

  • Loans short term: The company asks for money to a financial institution to cover its short-term needs.
  • Credits short-term bank: In this section, we study two ways:
    • The bank overdraft (or the popular red numbers): This is a rare source of financing that involves the use of an amount exceeding the available balance of a checking account.
    • Account credit: When the company wants to have the financial means to anticipate potential needs but does not know exactly how much will need, you may request a credit account; this method is that the company signed a contract with a financial institution that offers a current account with a limit.
  • The commercial credit: Auto financing is getting the company when it ceases to owe the purchases you make to suppliers. If the provider makes no discount for paying cash, this funding will be free.
  • The discounting of bills: Before maturity, the debts of customers documented in letters can be transferred to a financial institution, which will anticipate the amount in account after deducting certain amounts in fees and interest.
  • The factoring: It is another form of corporate financing is the sale of all receivables to customers (invoices, letters) to a company called a factor, which provides the company with immediate liquidity and avoids the problem of unpaid and delinquent because, unlike the deduction method, the company is not liable for non-payment of their customers.
  • Funds spontaneous financing: Are those sources that do not require prior negotiation.

2. Cost of a Funding Source

Most of the resources used by the company involve some hitches. The cost to the company sources of finance is different depending on the type of resources used:

  • Cost of equity: The contributions of the partners or reserves do not provide an enterprise with a commitment to pay a certain interest or dividend, which is why calculating the cost of these resources is difficult. The dividend policy followed by a company depends on many factors. The partner of a company, either by the acquisition of the shares at the time of creation or by the purchase of shares on the Stock Exchange, has a very high risk and does so because he hopes to get a return that compensates agency risk.
  • Cost of resources outside the medium to long term: In the case of outside sources in the medium and long term, there is always a contract which specifies the conditions for loans with the interest payable. To calculate the actual cost question (APR) must be taken into account all expenses. Financial institutions have to take the APR value of loans they offer.
  • Cost of debt capital in the short term: Between the short-term financial sources, it must differentiate between those requiring some negotiation and those that are spontaneous. Spontaneous sources such as wages of workers, the money owed to government agencies, credit providers to give when they do not offer any discount for paying cash, etc. These are resources that have a zero cost.
  • Cost weighted average of financial resources: To determine the average costs of resources used by the company, you can do a weighted average of the different cost taking as weights the percentage each funding source represents the total and the resources used. The amount so calculated is called the weighted average cost of funds. The lower the average cost of resources used, the greater the number of investments which are profitable to the company, i.e., to generate a profit.

3. Investment

The company, to carry out its activities, needs a set of elements or factors of production. For the manufacture of new products, it is necessary to acquire equipment, buildings, elements of transport, raw materials, labor, energy saving, etc. Thanks to the different economic agents, the company can get the resources they need to carry out their investment and thereby be eligible to make a profit. According to Pierre Massé, investment is the act whereby a change in an instant gratification and some to which the waiver by the hope that is acquired, of which the asset acquired is the support.

4. Characteristics of an Investment:

  • Initial Disbursement: Is represented by D0 and is the amount paid at acquiring the assets. This is called the zero point is usually the highest fee.
  • Duration temporary investment: The number of years, represented by n, during which he will produce cash inflows and outflows as a result of implementing the investment project.
  • Cash flows or quasi-rents net: Are represented by Fi and represent the difference between the charges (Ci) and payments (Pi) that the company supports over each of the n-long investment periods as a result of the project. Net cash flows are the difference between receipts and payments and not between income and expenditure. Income is the right of the company that money is paid, while the recovery is the realization of this right, i.e., the perception of money.
  • Value residual: The value of the property at the end of the life of the investment. It may be that this value is zero, in the case that the property has no acceptance in the marking. Is represented by R. This value is added to the collections of the last cash flow.