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Internal and External Sources of Fund
There are two type of funding companies utilizes to conduct business activities. Internal funding comes directly from the organization, and its owners. There many methods that internal funding can be achieved through, such as the owners putting the money into the company, selling of assets to raise capital, profits from the organization and depreciation of assets. External funding is achieved from other financial institutions, such as banks. External funds can be classified as bank loans, mortgages, and grants. In this paper I will discuss the differences between internal and external funds as well as, I will discuss when companies rely more on internal and external funding.
External funding is related to economic growth. When there is high external funding it usually means that the economy is growing (Gutmann, 1967). Businesses do not have balanced portfolio with internal and external funding. External...
When a company decides to buy a building they have to get loans. Most companies find it is more cost effective and strategic to utilize external funding for investment purposes (Oliner & Rudebusch, 1992).
Most companies utilize internal funds to conduct daily activities. The company sells it's good or services, collects the money to pay to bills, pay the employees, cover all cost and the remaining monies are counted as profitability. Unfortunately if a company decides to expand or make investments this money is usually not enough to make these adventures. Additional funding is usually needed for expansion or extension, and external sources are necessary for these functions. Companies that are able to cover their daily expenses with internal funds are profitable.
Companies rely on internal funding for their normal day-to-day…
References
Dickerson, A.P., Gibson, H.D. & Tsakalotos, E. (2000). Internal vs. external financing of acquisitions: Do managers squander retained profits? Oxford Bulletin of Economics & Statistics. 62 (3) 417-432
Gutmann, P.M. (1967). External Financing and the Rate of Economic Growth. American Economic Review. 57 (4) 864-870.
Oliner, S.D. & Rudebusch, G.D. (1992). Sources of the financing hierarchy for business investment. Review of Economics and Statistics. 74 (4) 643-654
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