Financial Management Define the Flow

Financial Management

Define the flow of funds model (Capital Markets, Money Market, Primary and Secondary Markets, Direct and Indirect Transfers and Financial Intermediaries). Explain each component and how funds flow from savers to producers.

The flow of funds model is looking at a county's balance sheet. During this process; there are several different components that are taken into consideration to include: capital markets, money market accounts, the primary / secondary markets, direct / indirect transfers and financial intermediaries. The combination of these elements is designed to provide clarity about the fiscal state of a particular nation. (Bosworth, 2001) (Moore, 2009)

Capital markets are examining the transparency and ability to raise money among different classes of investors. The funds that are provided are used as working capital which helps the businesses and other organizations to manage their operations. This ensures that they can continue to function and deliver different products / services to consumers. The way these funds flow from savers to producers is through direct investments from the actual firms or individuals. (Bosworth, 2001) (Moore, 2009)

Money market accounts are the funds which are being held in reserve at financial institutions. These instruments are used to help individuals and organizations to conservatively save their money at a stated interest rate. The way that it flows from savers to producers is through banking system. This is when they will loan out the funds to other customers at higher interest rates. As they are paying it back, investors will receive a greater rate of return. However, there are also stipulations placing restrictions on when and where the money can be withdrawn based upon these activities. This means after a certain date, they can access the funds without any kind of penalty. (Bosworth, 2001) (Moore, 2009)

Primary and secondary markets are when investors will offer firms with additional amounts of working capital. In exchange for providing them with these funds, they will become owners of corporation who are sharing in the profits. At the same time, they are holders of contrasting forms of private and public debt. This is used to help fund specific research and development programs. These funds flow from savers to producers via the centralized marketplace. This is where they can see the prices for the different classes of securities offered by corporations and governments. (Bosworth, 2001) (Moore, 2009)

Direct and indirect transfers are when there is a focus on the amount of funds which are sent to a particular country. This can occur directly through corporations repatriating the profits they generate from their operations overseas. At the same time, indirect transfers will take place with individuals who are working inside particular nation and they are sending money home to their families. The way these funds will flow from savers to producers is through them reinvesting a percentage of the profits back into the organization. This helps firms continue to grow and improve the return that investors are receiving. (Bosworth, 2001) (Moore, 2009)