Different Financial Sources for Business

As it has been observed that, an organisation has a lot of options to procure funds from. So it depends entirely upon the preferences of the management to choose the optimum source of finance. One of the most vital decisions making imperative in this regard is the cost of finance. The various types of funds availed by a business can be categorized in two different types:

·       Equity funds – Equity funds are the owned capital of the organisation. It includes funds gathered by issuance of equity shares and retained earnings. The cost of availing the equity funds is the dividends payable and for retained  earnings the cost can be considered as the opportunity cost of the interest that is forgone which if the money was given as dividend to the investors would have received due to investing the same.

·       Debt funds – Debt funds are the funds procured by the business in form of loan/debt i.e. by issuance of debentures or taking of loans from different financial institutions. The cost for debt is the financial charges payable for procuring the loan. 

Effect of finances on the financial statements

Every source of finance has its own explicit and implicit implication. The source of finance obtained has a direct impact on the financial accounting of a company like Profit and Loss Account, Balance sheet and cash flow statement.  An analysis of the impact of them is being discussed underneath,

·       Impact of Equity: If a company raises funds by issuing shares then the balance sheet of the company and the cash flow statement of the company gets affected but this will not have any impact in the profit and loss account of the company as the dividend that will be issued by the company is an appropriation of profit and not a charge on profit.

·       Impact of Debt: If the company raises funds by debt financing i.e. by issuing debentures, obtaining term loans or issuance of any other debt instruments then the profit and loss account of the company gets impacted as the interest is a charge on the profits of the organisation it is represented as an outlay in the profit and loss account and it also impacts the cash flow statement and the balance sheet of the company.