Distinguish Between Internal and External Sources of

Distinguish between internal and external sources of funds. Do corporations rely more on external or internal funds as sources of financing? One of the most vital components for any corporation is working capital. Part of the reason for this, is because it is used as a way to help fuel their expansion efforts, while at the same time maintaining adequate cash reserves. This allows the company to grow at a steady pace and develop market share in the various segments for new products and services.

Once this occurs, is when the firm can be able to rapidly expand in these areas and ensure that they have solid a foundation in doing this. Over the course of time, this will allow an organization to be able to establish itself and increase their overall profits margins for shareholders. During this process they will use both internal and external sources of funding. To determine which approach is more effective requires: comparing the two with each other and analyzing which one of them are being utilized the most.

This will help us to understand when these various sources are used and how they can help an organization over the long-term. The differences between Internal and External Sources of Funding Depending upon: the size, philosophy and goals of a corporation; the underlying amounts of funding will vary from one firm to the next. As far as internal sources are concerned, this is when a company will raise money through areas within the company itself.

A few of the most notable include: member / employee contributions, the sale of assets, retained profits and the marketing of various goods / services. These different elements are important, because these kinds of resources are often used by companies that are small and wanting limited amounts of financing. As, this is placing restrictions on: where the company is raising new capital and its overall focus on how to achieve various organizational objectives. (Groupelli, 2006, pp.

200 -- 214) ("Internal Financing Sources," 2011) ("External Financing Sources," 2011) External resources are when a corporation is raising money through the public markets most notably: stock and bond offerings. In general, this kind of financing is often used as a way to help a firm be able to expand, even though it might not have the funds to do so internally. As, they will typically raise money through an: equity securities or debt initial public offering (IPO). This is when a company will sell common stock or some kind of bond to investors.

The basic idea is that, the general public can provide the organization with the funds that it needs to be able to expand. In exchange for investors loaning the company their money, they will receive some additional benefits that may not be offered with other asset classes. In the case of equity securities, investors are considered to be owners of the company and they share in the overall profits as well as dividends.

Over the course of time, this will provide shareholders with a larger total return by allowing them to have two forms of compensation they are receiving. As far as bondholders are concerned, they are loaning the company money and will receive some kind of interest from them. In some cases, these kinds of assets can be tied directly to a particular physical piece of equipment or property. While at other times, the firm can sell bonds based on the faith that investors have in their ability to repay the loan.

In the event that there is a bankruptcy, these investors will receive their fair share of the company's assets first. The reason why is because, bondholders are considered to be creditors of the firm. This means that they will be paid before stockholders in the event of some kind of liquidation. (Groupelli, 2006, pp. 200 -- 214) ("Internal Financing Sources," 2011) ("External Financing Sources," 2011) Are Companies Relying more on Internal or External Sources of Funding? Corporations are utilizing the external sources of funding more than others.

The reason why, is because they can raise larger amounts of cash and they have flexibility to determine how they are using these funds. During the middle of a corporate expansion, is when this kind of financing is ideal by: providing adequate amounts of funding and the ability to utilize the money where it will benefit the firm the most. Once this occurs, is when a company can be able to increase their earnings through reaching out to new market segments.

At which point, they can help to increase their stock price and the value of the company. (Groupelli, 2006, pp. 200 -- 214) ("Internal Financing Sources," 2011) ("External Financing Sources," 2011) However, in some cases internal financing is ideal for those firms that need to: only raise a certain amount of capital or they want to keep the number of investors limited. This is when they will utilize this source of funding. As it is providing.