In this course, we will delve into the fascinating world of business finance, exploring the different sources of finance available to organizations and their importance.
Internal finances refer to the funds that are generated within the organization. These can include retained earnings (profits that the company has chosen to reinvest in the business rather than distribute to shareholders) and equity (funds raised from the owners or shareholders of the company).
Company A has made a profit of $1 million this year. Instead of distributing this profit to its shareholders, it decides to reinvest this money into the business. This is an example of using retained earnings as a source of internal finance.
Understanding the importance of internal finances is crucial for any company. They provide a reliable and readily available source of funding, which can be used to finance growth, research and development, or other strategic initiatives.
External finances, on the other hand, are funds that come from outside the organization. These can include loans (money borrowed from a bank or other financial institution), investments (money provided by investors in exchange for a share of the company), and grants (funds provided by government or other organizations that do not need to be repaid).
Company B needs additional funding to expand its operations. It decides to borrow $2 million from a bank and also secures a $500,000 grant from a government program. These are examples of using loans and grants as sources of external finance.
External finances can provide a significant boost to a company's resources, allowing it to undertake large projects or expansions. However, they also come with their own set of challenges and risks, such as interest payments on loans and the dilution of ownership through investments.
By the end of this course, you will have a comprehensive understanding of the different sources of finance available to organizations and their importance. This knowledge will be invaluable in helping you make informed decisions about how to finance your own business ventures.