The most prominent advantage for using equity finance is that the investor’s money can be used for whatever purpose the business requires it for, and that there is no interest charged on the amount invested as it is normally with loans who charge interest on money lent. Also shareholders are rewarded through dividends that can be issued whenever the business deems relevant. So if the investment has not gone to plan then it is not compulsory that the business will have to pay out large amounts of money in dividends.
Another advantage for the business is that certain investors can bring valuable experience and skills to the organization as they will look to maximize profits in their investment. An example could be a wealthy and experienced business investor that has shares in many different companies may hold helpful information and could even assist with decision making where required. The reason behind that is that the investors will have a genuine interest in the success and profitability of the business as much as the actual company does.
Also if the investors deem their investment to have been a success then they are more likely to provide funding through shares if required again.
In business there are never only just positives that arrive from investments, they also have disadvantages. The main disadvantages that could arise from using equity finance as a source of money raising is the fact that it can be very demanding. It can prove to be costly and very time consuming which could lead to the business suffering. Most potential investors will ask for background information and will analyse in depth all past results and future forecasts and will look to question all aspects of the business before agreeing to invest their money into the business. The business may find a lot of potential investors that will ask for more that the business is wiling to put down, an example of this would be an investor asking for higher amounts of influence in decision making. Another disadvantage for the business would be the fact that the company will have to invest time into providing information to all investors on a frequent basis, so they can closely monitor the progress of their investments
Also by issuing large amounts of shares the business is diluting its ownership of the business as it is essentially selling of small chunks of the businesses ownership.
The other way to gather capital for a business is through debt finance. Debt finance is money that a business borrows and has to pay back. This is normally borrowed from banks or other lenders, these debts will usually be needed to be paid back monthly with a certain amount of fixed interest normally charged.
An advantage of using debt financing is that compared to equity financing you do not have to give up any ownership or profits of your business and the lender has no control over how you run your business. All they require is for the business to keep up with payments. Another major advantage of using debt finance is the fact that using borrowed money allows the company to keep its profits and use them within the organization, rather than having to give them to shareholders.
The disadvantages of debt financing are that it is most likely that you will use your profit to pay back the interest on the loan. Most lenders base their interest on what they rate your company in terms of risk. The riskier the loan is for them, the higher rate of interest they are likely to charge. Another major disadvantage of taking out a loan would be that it is likely they will secure the loan against your business and its assets. This means that if the company cannot afford to pay the loan back, the loan company will be able to seize the assets of the business. To avoid this it is necessary that the business has a steady income coming in that will allow them to keep up with repayments. Also if the business is seen to have too much debt it could affect a businesses credit rating which in turn could affect the companies ability to secure further loans in the future.
Ways in which internal sources of finance can be more effectively be managed to avoid the use of any external sources of funding
A business does not always have to resort to external sources of finance, they also have the choice of using internal sources of finance. One option that is open to them is that they could revert to using their retained profits and use that money to invest in any projects that the business intends to carry out. If a company has shareholders then under normal circumstances the retained profit is paid out to shareholders through dividends. These dividends are not compulsory for the business to pay out but are done more by choice. I believe that this could prove more beneficial for the business as they have an option of giving shareholders higher dividends at a later date if their projects increase profits. This will also benefit the company by not having to dilute the companies ownership through the issuing of new shares. Another benefit of using this source of internal finance is that the funds are immediately available for use as the business will already hold them. Also this can be done directly through the board as they will not need approval from third party people. This method could be very beneficial for the company as they are not having to borrow any money or sell parts of their ownership and could be very effective if carried out properly. One disadvantage of this could be that the shareholders may get upset with the fact that they will not be receiving any dividends but this could be overcome by showing that the investment being mad could potentially benefit them more in the long term.
Another method of internal financing that could be used is reducing stock levels. Most companies hold large amounts of stock within their business as a precautionary method incase the business has increased business sales. If a business was to reduce its stock levels then it would free up money for the business to invest into more profitable opportunities. This could prove beneficial to the company but they are also running a risk of leaving themselves short on stock. If the company was to have insufficient stock then it could damage their customer relations and lose them potential customers and sales. If this was to occur then it would damage the business in the long run as they would have lost out on potential customers who are likely to revert to using rival companies as their chosen company cannot cater to their needs.
Objectives of a Finance Manager and how these can be equated to maximising the ordinary share price of the business
The main roles and objectives of a finance manager is to advise the company on all aspects of finance, this will include how they spend their money and any investment that they are likely to take up. All shareholders will want to maximize their share prices and this is achieved through the business achieving high profits, an example of this could be that all the workers within the organization will want to earn the highest wage possible. Wage is a cost for the business that brings down the company profits, the business has a duty to please both its workers and its shareholders so to achieve the highest possible share price the business will have to create a balance between the two. There is an obvious clash with the business who will look to spend as little as possible to maximize profits. The business will look to maximize profits but the workers are the people who help to achieve that goal and if workers are unhappy then they are likely to underperform which will lead to a fall in profits. Another way that causes a problem is the relationship with the supplier, the supplier will sell to a business at lower cost if they order more so the business will order extra stock which will in the short term bring down the profits of the company but in the long run will benefit the company as production costs will be lower. There are many other aspects that could affect profit which in turn affects the share value.
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