Own funds play a major role in organizing the circulation of funds, since enterprises operating on the basis of commercial calculation must have a certain property and operational independence in order to conduct business profitably and bear responsibility for the decisions made.
Depending on the method of formation, an enterprise’s own sources of financing are divided into internal and external (attracted).
Internal sources of own funds are formed in the process of economic activity and play a significant role in the life of any enterprise, since they determine its ability to self-finance. It is obvious that an enterprise that is able to fully or largely cover its financial needs from internal sources receives significant competitive advantages and favorable opportunities for growth by reducing the costs of attracting additional capital and reducing risks.
The main internal sources of financing of any commercial enterprise are net profit, depreciation charges, sale or rental of unused assets, etc.
In modern conditions, enterprises independently distribute the profits remaining at their disposal. Rational use of profits involves taking into account factors such as plans for the further development of the enterprise, as well as respecting the interests of owners, investors and employees. In general, the more profits are used to expand business activities, the less the need for additional financing. The amount of retained earnings depends on the profitability of business operations, as well as on the policy adopted by the enterprise regarding payments to owners (dividend policy).
The advantages of reinvesting profits include:
no costs associated with raising capital from external sources;
maintaining control over the activities of the enterprise by the owners;
increased financial stability and better opportunities to attract funds from external sources.
In turn, the disadvantages of using this source are its limited and changing value, the complexity of forecasting, as well as dependence on external factors beyond the control of management (for example, market conditions, the phase of the economic cycle, changes in demand and prices, etc. ).
Another important source of self-financing for enterprises is depreciation charges. They are included in the costs of the enterprise, reflecting the depreciation of fixed and intangible assets, and are received as part of cash for sold products and services. Their main purpose is to ensure not only simple, but also extended reproduction.
The advantage of depreciation charges as a source of funds is that it exists in any financial situation of the enterprise and always remains at its disposal. The amount of depreciation as a source of investment financing largely depends on the method of its calculation, which is usually determined and regulated by the state. The chosen method of calculating depreciation is fixed in the accounting policy of the enterprise and is applied throughout the entire service life of the fixed asset.
To more effectively use depreciation charges as financial resources, an enterprise needs to pursue an adequate depreciation policy. It includes the policy for the reproduction of fixed assets, the policy in the field of application of certain methods for calculating depreciation charges, the choice of priority areas for their use and other elements.
In some cases, it is possible to attract additional financial resources into economic circulation from internal sources through the sale or lease of unused fixed and current assets. However, such transactions are one-time in nature and cannot be considered as a regular source of funds.
Internal sources also include so-called sustainable liabilities. These are funds that do not belong to the enterprise, but are constantly in its circulation. These include:
minimum monthly wage arrears
employees of the enterprise;
reserves to cover upcoming expenses;
minimum carryover debt to the budget and extra-budgetary funds;
creditor funds received as an advance payment for products (goods, services);
buyer funds for deposits for returnable packaging;
carryover balances of the consumption fund, etc.
Despite the advantages of internal sources of financing, their volumes, as a rule, are insufficient to expand the scale of economic activity, implement investment projects, introduce new technologies, etc.
In this regard, there is a need to additionally attract own funds from external sources.
Enterprises can raise their own funds by increasing their authorized capital through additional contributions from founders or issuing new shares. Opportunities and methods for attracting additional equity capital significantly depend on the legal form of business organization.
Joint-stock companies that are in need of investment can carry out additional placement of shares by open or closed subscription (among a limited circle of investors). In general, an initial public offering of shares of an enterprise is a procedure for selling them on an organized market in order to attract capital from a wide range of investors.
Financing through the issue of ordinary shares has the following advantages:
this source does not imply mandatory payments, the decision on dividends is made by the board of directors and approved by the general meeting of shareholders;
shares do not have a fixed maturity date; they are permanent capital that cannot be “returned” or redeemed;
conducting an IPO significantly increases the status of an enterprise as a borrower (the credit rating increases; according to experts, the cost of attracting loans and servicing debt decreases by 23% per annum); shares can also serve as collateral to secure debt;
circulation of company shares on stock exchanges provides owners with more flexible opportunities to exit the business;
the capitalization of the enterprise increases, a market assessment of its value is formed, and more favorable conditions are provided for attracting strategic investors;
the issue of shares creates a positive image of the enterprise in the business community, including the international one, etc.
The general disadvantages of financing by issuing ordinary shares include:
granting the right to participate in the profits and management of the company to a larger number of owners;
the possibility of loss of control over the enterprise;
higher cost of capital raised compared to other sources;
the complexity of organizing and conducting the issue, significant costs for its preparation;
additional issue may be viewed by investors as a negative signal and lead to a fall in prices in the short term.
For some enterprises, an additional source of formation of their own financial resources is the gratuitous financial assistance provided to them. In particular, these can be budgetary allocations on a non-repayable basis; as a rule, they are allocated to finance government orders, certain socially significant investment programs or as state support for enterprises, the production of which is of national importance.
Other external sources include tangible and intangible assets donated to firms and included in their balance sheets.
In general, at present it is more profitable for enterprises to attract loans, which in the current conditions represent a cheaper, simpler and more effective way of raising capital.
External financial resources– this is a type of enterprise resources, which is expressed in the form of attracted and borrowed capital.
The concept of financial resources of an enterprise
Entrepreneurial activity involves managing finances, funds, through their deposits and expenses, with the aim of making a profit in the future. Accordingly, for this, a business entity must have capital, which can be formed thanks to invested resources of various origins.
The enterprise's own budget is formed, first of all, thanks to the contributions of the participants. In the future, if the activities carried out by the legal entity are successful, the source of the formation of internal resources will be income from such activities. Net profit is calculated from the sum of income and expenses, which include the costs of conducting business and paying necessary payments (taxes, loan obligations, etc.). In addition, the operating budget of the enterprise is expressed in depreciation charges.
External financial resources of the enterprise
Despite the fact that own funds can, to a certain extent, ensure the activities of a particular enterprise, it is impossible to imagine in modern conditions a business that is not supported by third-party resources and contributions. External sources of financial resources include attracted and borrowed funds. They form entrepreneurial and loan capital, respectively.
The first is expressed in the investment of the enterprise’s activities by third parties, legal entities or individuals. Sometimes, entities with sufficient resources prefer to finance an existing business instead of creating their own. In addition, investing in a particular enterprise can be carried out for the purpose of repurchasing shares and obtaining management rights.
Loan capital is transferred to a business entity only for a time, while the financial organization has its own benefit, expressed in the form of interest payments.
The ratio of entrepreneurial and loan capital
It is worth saying that in the modern economic situation, the sources of formation of these types of capital may overlap. That is, the financial resources attracted to the activities of the enterprise often themselves consist of credit funds. This is not always good, because the circulation of such resources is difficult, since banks and other financial organizations prefer to exercise tighter control over the funds issued on loan.
Essence of raised capital
Let us note that entrepreneurial capital forms both internal and external sources of financial resources of the enterprise. Partially, these funds are used to create the necessary material funds to ensure the activities of business entities. Their other part is the authorized capital, which is formed through the sale of company shares. In fact, it is the attracted capital that helps the enterprise carry out financial transactions.
The essence of loan capital
These resources can be considered a means of operational regulation of economic activities. Since the company receives borrowed money only for a short period, this determines its liquidity and turnover rate. Loan capital can be formed through credit loans from banks and non-bank entities, and through the sale of the company's bonds.
7. Own financial resources of the enterprise. Composition and conditions of formation.
It is worth highlighting the concept of “capital” - part of the financial resources invested in production and generating income upon completion of the turnover.
Major share in own financial resources constitutes profit remaining at the disposal of the organization (enterprise) and distributed by decision of the governing bodies. Depending on the financial policy of the organization (enterprise), the profit remaining at its disposal can be used as follows:
Aimed at consumption in full;
Fully invested in other projects not related to the organization’s activities;
Reinvested in the development of the organization in full;
Distributed in the first three directions.
The second most important source of own financial resources are depreciation deductions - monetary expression of the cost of depreciation of fixed production assets and intangible assets. They have a dual nature, since they are included in the costs of production and then, as part of the proceeds from the sale of products, go to the company’s current account, becoming an internal source of financing for both simple and expanded reproduction. Accumulated depreciation charges form a depreciation fund intended for the reproduction of worn-out fixed assets.
Not all profits remain at the disposal of the organization (enterprise); part of it in the form of taxes and other obligatory payments goes to the budget system. The profit remaining at the disposal of the organization (enterprise) is distributed by decision of the governing bodies for the purposes of accumulation and consumption and reserves. Profit allocated for accumulation is used for the development of production and contributes to the growth of the enterprise's property. Profits allocated for consumption are used to solve social problems.
8. External sources of financial resources.
Financial resources of the organization (enterprise) - This is the totality of one’s own cash income in cash and non-cash form and income from outside (attracted and borrowed), accumulated by an organization (enterprise) and intended to fulfill financial obligations, finance current costs and costs associated with the development of production.
Based on the sources of education, financial resources are divided into own (internal) and attracted on different terms (external), mobilized in the financial market and received in the order of redistribution.
Attracted, or external, sources The formation of financial resources can be divided into own, borrowed, received through redistribution and budgetary allocations. This division is determined by the form of capital investment. There are two options for raising funds in the capital market: equity and debt financing. With equity financing, the company issues and places its shares on the stock market. The second option involves the issue and placement of bonds (fixed-term securities), i.e. provision of capital on the basis of a bond issue. If external investors invest money as entrepreneurial capital, then the result of such an investment is the formation of attracted own financial resources.
Entrepreneurial capital represents capital invested in the authorized capital of another organization (enterprise) for the purpose of making a profit or participating in the management of the organization (enterprise).
Loan capital transferred to an organization (enterprise) for temporary use on the terms of payment and repayment in the form of bank loans issued for different periods, funds of other organizations (enterprises) in the form of bills of exchange, bond issues.
Funds raised in the financial market include funds from the sale of own shares and bonds, as well as other types of securities.
To funds arriving in order redistribution, include insurance compensation for incurred risks, financial resources coming from concerns, associations, parent companies, dividends and interest on securities of other issuers, budget subsidies.
Budget allocations can be used both on a non-refundable and returnable basis. As a rule, they are allocated to finance government orders, individual investment programs, or as short-term government support for organizations (enterprises) whose products are of national importance.
Financial resources are used by an organization (enterprise) in the process of production and investment activities. They are in constant motion and are in monetary form only in the form of cash balances in a current account in a commercial bank and in the cash desk of an organization (enterprise).
Due to the financial flow from the main activity. Internal sources- these are the resources of the company itself or funds provided free of charge, that is, on the condition of irrevocability.
The essence of internal sources
The procedure for financing an organization is a complex set of various methods and forms, conditions and principles that make it possible to ensure the normal functioning of the organization in the current economic conditions. As a rule, financing is the process of forming capital for an enterprise in various forms. At the same time, financing and investment are two interrelated concepts. A company cannot plan investments without having its own sources of capital. Fundamentally, financing is the formation of capital, and investing is the application of it.
When deciding on sources of financing (including internal ones), the company must solve several main problems :
1. Determine your own need for capital (short-term and long-term).
2. Guarantee the solvency of the enterprise. Here we are talking primarily about financial stability.
3. Timely identify problems in the capital structure and property of the enterprise. This approach allows for timely correction of unsatisfactory performance.
4. Reduce funding for activities to a minimum.
5. Properly use your own and.
In this case, everything is conditionally divided into two categories – internal (your own company) and external (money raised from outside).
For most enterprises, internal sources are the basis of their activities. In this case, financing is based on depreciation charges and income that the company receives from its activities (as a rule, we are talking about net profit), money from emissions, depreciation of intangible assets, and so on.
Using internal sources for financing has a number of advantages :
1. Enterprises gain greater financial stability thanks to a timely increase in profits.
2. The process of creation and use of equity capital is stabilized.
3. The procedure for making management decisions related to the development of the company is greatly simplified.
4. The costs associated with external financial injections are significantly reduced, that is, the company spends less money to cover debts of creditors.
Disadvantages of Internal Sources the fact is that in practice they cannot always be used for the development of the company. In particular, the same depreciation charges have already lost their effect for most of the equipment. In addition, at domestic enterprises they are greatly underestimated.
The possibility of using internal sources largely depends on a number of factors - the company’s capabilities, quality of management, field of activity, demand for goods, monetary, depreciation, tax, customs and budget policies of the country.
Types and features of internal sources
Each enterprise can distinguish several types of internal sources :
1. Depreciation charges. For almost all companies operating in modern market conditions, depreciation charges have always been the main internal source. This capital is one of the elements of revenue received through the sale of manufactured products (services) and the transfer of funds to enterprises. It is this money that management uses to cover costs in key areas. Often, depreciation charges, together with the company's net profit, end up in the current account and form the enterprise.
Depreciation charges themselves are the cost of depreciation of intangible and fixed assets of an enterprise, which has a standard financial expression. They are the internal sources of financing for various areas of both advanced and simple production. The main objects (sources) of depreciation funds are those objects that are the property of the company. In this case, the money comes from the transfer of property for rent. In the case of leasing, the transfer of depreciation funds can be the task of the lessee and the lessor (much depends on the agreement of the parties).
As a rule, depreciation charges are directed toward the restoration of available means of reproduction. That is, the equipment involved in the production of the company’s main products is being updated. At the present stage, depreciation charges are constantly depreciating. The main reason is, which reduces the role of depreciation funds as internal sources.
2. Depreciation of intangible assets– the second most important internal source of the enterprise. These funds are accrued according to the standards determined by the company itself. At the same time, the calculation is always based on the initial price and the planned period of use of intangible assets.
3. Budget financing. If there is a surplus in the state budget, the country can invest in various projects from internal sources. At the same time, various methods can be used here - potentially interesting objects and financing that does not imply a return of transferred funds.
As a rule, budget money is allocated for the implementation of only a small volume of regional programs, the formation and strengthening of federal infrastructure, the construction of especially important facilities for the country, and so on. At the present stage, the state is trying in every possible way to support two directions - scientific-production and industrial.
A big plus for the company is receiving a large government order. In this case, you can count on receiving stable targeted funding for a long time.
If there is a lack of its own financial resources, the enterprise can use borrowed and attracted financial resources.
Borrowed sources of financial resources include:
a) loans from financial institutions;
b) budget loans;
c) commercial loans;
d) accounts payable, constantly in circulation, and others.
The attracted sources of financial resources include:
1) means of equity participation in current and investment activities;
2) funds from the issue of securities;
3) shares and other contributions of members of the labor collective, legal entities and individuals;
4) insurance compensation;
5) receipt of payments for franchising, rent, sales.
Borrowed funds include loans from commercial banks and other credit organizations, and other loans. Raised financial resources include funds raised by issuing shares, budgetary allocations and funds from extra-budgetary funds, as well as funds from other enterprises and organizations raised for equity participation and for other purposes.
All liabilities of the enterprise are formed from borrowed funds: internal (internal accounts payable, deferred tax payments, etc.), and external (bank and commercial loans, issue of own bonds, financial leasing). Depending on the urgency of repayment, they are usually divided into long-term and short-term liabilities.
Based on the duration of use, the capital of an enterprise is divided into constant and variable.
Constant capital is formed from the enterprise's own capital and its long-term borrowed funds.
One of the central issues of financial management is capital price management, which is based on assessing the need for resources and analyzing the price of individual financial resources, which are determined by the enterprise’s own interests and the laws of supply and demand in capital markets.
When considering the issue of the price of capital, the sources of its formation are usually divided into internal and external.
Internal - created in the course of the enterprise’s activities, the payment for the use of which may be lost average market income on retained earnings, reserve and insurance capital, etc.
External - resources are purchased on financial markets and have their own terms of attraction, term and price. The price of external resources can be: interest paid for using bank loans; fines and penalties on commercial loans; interest on issued bonds; discount on bills; dividend paid to shareholders.
The total amount of funds that must be paid for the use of a certain volume of financial resources, expressed as a percentage of this volume, is called the price of capital.
The concept of the price of capital is one of the basic ones in the theory of enterprise management. It is not limited to calculating the interest that must be paid to the owners of financial resources, but also characterizes the profitability of invested capital that the enterprise must ensure in order not to reduce its market value.
To cover the needs for fixed and working capital, in some cases it becomes necessary for an enterprise to attract borrowed capital. Such a need may arise as a result of deviations in the normal circulation of funds for reasons beyond the control of the enterprise:
Non-obligatory partners, emergency circumstances, etc.;
During the reconstruction and technical re-equipment of production;
Due to lack of sufficient start-up capital;
For other reasons.
Borrowed capital by period of use is divided into long-term and short-term. Long-term liabilities include capital with a maturity of more than one year, and up to one year are classified as short-term liabilities. Elements of fixed capital, as well as the most stable part of working capital (insurance stocks, part of accounts receivable) must be financed from long-term capital. The rest of the current assets, the value of which depends on the flow of goods, is financed by short-term capital.
The main forms of long-term liabilities are long-term bank loans and long-term borrowed funds (debt on a tax credit; debt on issued bonds; debt on financial assistance provided on a repayable basis, etc.), the repayment period of which has not yet come or has been repaid within the stipulated time. term.
Short-term financial liabilities include short-term bank loans and borrowed funds, various forms of accounts payable of an enterprise (for goods, works and services; for bills issued; for advances received; for settlements with the budget and extra-budgetary funds; for wages; with subsidiaries; with other creditors) and other short-term liabilities.
Borrowed capital is characterized by the following positive features:
1. Sufficiently wide opportunities for attraction, especially with a high credit rating of the enterprise, the presence of collateral or a guarantor’s guarantee;
2. Ensuring the growth of the financial potential of the enterprise if it is necessary to significantly expand its assets and increase the growth rate of the volume of its economic activities;
3. Lower cost in comparison with equity capital due to the provision of a “tax shield” effect (withdrawal of costs for its maintenance from the tax base when paying income tax);
4. The ability to generate an increase in financial profitability (return on equity ratio).
At the same time, the use of borrowed capital has the following disadvantages:
1. The use of this capital generates the most dangerous financial risks in the economic activity of the enterprise. The level of these risks increases in proportion to the increase in the proportion of use of borrowed capital;
2. Assets formed from borrowed capital generate a lower rate of profit, which is reduced by the amount of loan interest paid in all its forms;
3. High dependence of the cost of borrowed capital on fluctuations in financial market conditions. In a number of cases, when the average loan interest rate in the market decreases, the use of previously received loans (especially on a long-term basis) becomes unprofitable for the enterprise due to the availability of cheaper alternative sources of credit resources;
4. The complexity of the attraction procedure, since the provision of credit funds depends on the decisions of other business entities, requires in some cases appropriate third-party guarantees or collateral.
Borrowed resources are not the property of a given enterprise and their use is fraught with loss of independence for it. Borrowed funds are provided on terms of urgency, payment, and repayment, which ultimately leads to their faster turnover compared to own resources. Borrowed funds include various types of loans attracted from other parts of the credit system (banks, investment institutions, the state, enterprises, households).
Attracted resources are funds that do not belong to the enterprise, but are temporarily in its circulation. These funds, before sanctions (fines or other obligations to the owners) arise, can be used at the discretion of the business entity. These are, first of all, stable liabilities - arrears of wages to employees, debt to the budget and extra-budgetary funds, funds from creditors received in the form of prepayments, etc.
The relationship between these elements of financial resources determines the financial stability of a business entity.
The next sign of the allocation of elements of financial resources is the urgency of use. As a rule, resources are classified into: short-term; mid-term; long-term.
Short-term resources - their validity period is up to a year. Designed to finance the current activities of the enterprise: the formation of working capital, short-term financial investments, settlements with debtors.
Medium-term resources - from one to 3 years - are used to replace individual elements of fixed assets, their reconstruction and re-equipment. In this case, as a rule, the goal is not to change technology or completely replace equipment.
Long-term resources - are attracted, as a rule, for a period of 3 to 5 years and are used to finance fixed assets, long-term financial investments, and risk financing. In our opinion, the minimum time limit (3-5 years) of these funds is determined by the validity period of fixed assets. This is how long, on average, machines and equipment are used in economically developed countries. Beyond this period, their use is fraught with an overestimation of the cost of manufactured products (due to moral and physical wear and tear). Since the lower time limit for the use of these resources is determined by the functioning of machinery and equipment, it is logical to allocate another group of resources here - for financing objects beyond long-term purposes, i.e. buildings, structures. The time limit can be 10-15 years or more. It is for these terms that it is possible to obtain a mortgage loan.