Business Creation and Growth Chapter 1

Sources of fund for small and medium scale business:

Author: Eze-Odikwa Tochukwu Jed

Note: All articles posted here are accurate, up-to-date and drafted from real university curriculums. Proper references will be added at the bottom of this article upon its completion. 

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Introduction

After conceiving a business idea an entrepreneur needs money to commence his or her business.

Money: is something generally accepted as a medium of exchange of goods, services, a measure of value, or a means of payment of debts; it is equally officially stamped metal currency, paper money or banknotes.

Finance: is a body of facts and knowledge dealing with the problems of raising and allocating financial resources profitability for effective operation of business, government, individuals and organizations. Financial management is the planning and controlling of funds to be raised at the right time and at the lowest possible cost and allocating it in the most profitable way. It includes the study of financial institutions and markets as well as the activities of government in financing public sectors. Funds flow from the areas of surplus economic units to the areas of deficit economic units through the institutions within the context of accepted rules and regulation. Finance is needed for two investment purposes: Fixed capital investment and Working capital investment.

The investment in fixed capital include investments in land and building, plant and machinery, and physical facilities for starting business. The investment in working capital investment is investments in the stock of raw materials, goods in progress and finished goods for meeting the expected increase in the level of production, sales, advertising, sales promotion campaign and competitive credit term. Finance is therefore needed to start, operate and to make business grow.

Finance consists of two inter-related areas mainly: macro-finance and micro-finance. Macro-finance deals with the problem of raising and allocating financial resources profitability for effective operations of the aggregate economy. It includes the study of money and capital market. Micro economics deals with the problem of raising and allocating financial resources profitably for effective operations of unit economy as business, government and individual.  

The scope of finance can be in terms of business finance and the financial management. Business finance deals with the problem of raising and allocating financial resources profitably for effective operations of business firms. Business financing must be operated within the framework of clearly understood objective and on the basis of logical concepts.

Financial management deals with the skillful plan, control and execution of firms financial activities which aims at achieving the financial goal of maximizing the value of the shareholders shares. The major function of the financial manager is planning the acquisition and utilization of funds in ways that can maximize the efficiency of organizational operations. In this case, he identifies the financial goal of the organization and sources the finance to achieve it. The financial manager specifically ensures that funds are made available at the right time, obtained at the lowest possible cost and utilized in the most effective and profitable way. These financial management functions are inter-related. The timing of raising the funds depends on the requirements of the purposed uses. Conversely, whether or not a particular use of fund is attractive depends on the cost and availability of these funds. The effective discharge of this function requires a financial manager to have a good knowledge of accounting, law, economics and quantitative analysis. The functions of financial management include: Financial analysis, Asset structure management, financial structure management, Capital investment management and Dividend decisions. The purpose of financial management is to maximize shareholders wealth.

Activities of Finance: posits that, finance deals with activities of: Raising of funds, investing the funds in worthwhile projects, managing the cash flows released from the projects and returning the funds to funding sources. To start or run the business, funds may have been saved and/or borrowed in the case of the sole proprietorship; or contributed by partners, in the case of partnership. The major sources of funds for limited liability companies are; shareholders money (equity capital), and borrowed funds (debt capital). Government parastatals are primarily supported with governments funds, debt funds and shareholders money in some areas. The proportion of debt/equity is usually a function of the cost of debt and the degree of financial wealth. The finance officers attempt to minimize cost so as to maximize profits available to them. The finance officer looks for the cheapest sources of debts because debts have costs.

Funds investing: To invest in a profitable project, finance managers ensure that funds are invested in projects that yield a return in excess of the cost funds. Prospective projects have to be analyzed carefully to ensure that the cash inflows resulting from the projects are greater than the cash outflow. The difference between inflows and outflows is the net contribution of the project to the value of the firm. Projects that make positive contributions are accepted whereas those that have negative contributions are rejected.  

Cash flow management: To manage funds flowing from adopted projects and the working capital for running the business, the time value of money is recognized. The theory of time value of money states that a Naira received today is worth more than one to be received tomorrow and much more than one received one year hence. For the naira received today, its value one year from now equals its present value plus interest it would attract if saved in a bank for a year. On the other hand, the naira to be received next year is worth less than the naira received today. The implication of time value of money to the financial theory is that funds are held in the amount just enough to meet transaction, precautionary and may be speculative means. The excess funds should be put in near cash financial assets which are easily marketable, and which can yield some interests e.g. treasury accumulated. Good cash flow management dictates that the financing manager should attempt to collect money owed to his business fast and if possible, should delay payment to his business creditors. The prescription is good financial management since payment delayed is subsequently paid in cheaper naira.