external financing needs

Examples of external financing needs in the following topics:

• Financing Life Cycle of the Firm

  • Firms progress through four stages of a developmental life cycle, each with their own funding needs.
  • Its external financing needs (EFN) are high, since it needs money to develop but lacks retained earnings.
  • After the firm is able to acquire external funding and develop its product/service, it enters the growth phase.
  • In the growth stage, a firm's initial EFN is high relative to its current value; it needs significant funds for growth.
  • They may choose to retire debt or repurchase stock, as significant external financing is no longer necessary.

• Pecking Order

  • In corporate finance pecking ordering consideration takes into account the increase in the cost of financing with asymmetric information.
  • Pecking order theory basically states that the cost of financing increases with asymmetric information.
  • Financing comes from internal funds, debt, and new equity.
  • This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required.
  • Thus, the form of debt a firm chooses can act as a signal of its need for external finance.

• Capital Structure Overview and Theory

  • For example, a firm that sells 20 billion dollars in equity and 80 billion dollars in debt is said to be 20% equity-financed and 80% debt-financed.
  • It states that companies prioritize their sources of financing (from internal financing to issuing shares of equity) according to least resistance, preferring to raise equity for financing as a last resort.
  • Internal financing is used first.
  • This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, while debt is preferred over equity if external financing is required.
  • Thus, the form of debt a firm chooses can act as a signal of its need for external finance.

• Financing Company Operations

  • A company can be self-financed or financed through the solicitation and participation of outside investors.
  • Financial bootstrapping is a term used to cover different methods for avoiding the use of financial resources that come from external investors.
  • Many businesses need more capital than can be provided by the owners themselves.
  • In short, financing the operations of a company can come from within the firm itself or by using external resources.
  • The participation of external sources of funding may bring other benefits outside of the funds themselves.

• Types of Financial Decisions: Investment and Financing

  • There are two fundamental types of financial decisions that the finance team needs to make in a business: investment and financing.
  • All functions of a company need to be paid for one way or another.
  • There are two ways to finance an investment: using a company's own money or by raising money from external funders.
  • There are two ways to raise money from external funders: by taking on debt or selling equity.
  • Every investment can be financed through company money or from external funders.

• Additional Funds Needed (AFN)

  • AFN is "additional funds needed," and refers to the additional resources that will be needed for a company to expand its operations.
  • AFN stands for "additional funds needed. " It is a concept used most commonly in business looking to expand operations and influence.
  • To phrase it another way, the business must have some plan to actually finance the new assets that will be needed to increase sales.
  • Determining the amount of external funding needed is a key part of calculating AFN.
  • AFN determines the extra assets and financing that will be needed for a firm to undertake a new project or expand its operations and sales.

• Long-Term vs. Short-Term Financing

  • Long-term financing is generally for assets and projects and short term financing is typically for continuing operations.
  • Achieving the goals of corporate finance requires appropriate financing of any corporate investment.
  • The sources of financing are, generically, capital that is self-generated by the firm and capital from external funders, obtained by issuing new debt and equity.
  • Businesses need long-term financing for acquiring new equipment, R&D, cash flow enhancement and company expansion.
  • Major methods for long-term financing are as follows:

• Externalities

  • The cost of an externality is a negative externality , or external cost, while the benefit of an externality is a positive externality, or external benefit.
  • Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.
  • A voluntary exchange may reduce total economic benefit if external costs exist.
  • If there exist external costs such as pollution, the good will be overproduced by a competitive market, as the producer does not take into account the external costs when producing the good.
  • Positive externalities are often associated with the free rider problem.

• The Role of Financial Managers

  • These projects must also be financed appropriately.
  • Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.
  • The sources of financing are, generically, capital self-generated by the firm and capital from external funders, obtained by issuing new debt or equity.
  • Cash managers monitor and control the flow of cash that comes in and goes out of the company to meet the company's business and investment needs.
  • Financial managers increasingly assist executives in making decisions that affect the organization, a task for which they need analytical ability.

• Reasons to Study Finance

  • Finance is relevant to all business functions, the macroeconomy, and personal finances.
  • In order to invest, individuals must be able to do the same projections and valuations as companies in order to determine the best investment for their needs.
  • Of course, finance is an important field of study for those who have a desire of working in finance or accounting.
  • This is especially true higher up in the organizational hierarchy: managers, directors, and vice presidents need to be able to articulate why their departments should get financial support from the company.
  • There are set processes and theories for determining which financial option is best, but in the real world, it is rare to have all of the information needed to be absolutely certain about what to do.