Sources of Funds

Financing is needed to start a business and ramp it up to profitability. There are several sources

to consider when looking for funds. But first you need to consider how much money you need and when

you will need it.

The financial needs of a business will vary according to the type and size of the business. For

example, processing businesses are usually capital intensive, requiring large amounts of capital. Retail

businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain aspects

of a business may be an option. Also, incentives may be available to locate in certain communities

and/or encourage activities in particular industries.

1) Equity Financing

Equity financing means exchanging a portion of the ownership of the business for a financial

investment in the business. The ownership stake resulting from an equity investment allows the investor

to share in the company’s profits. Equity involves a permanent investment in a company and is not

repaid by the company at a later date.

The investment should be properly defined in a formally created business entity. An equity stake

in a company can be in the form of membership units, as in the case of a limited liability company or in

the form of common or preferred stock as in a corporation.

Companies may establish different classes of stock to control voting rights among shareholders.

Similarly, companies may use different types of preferred stock. For example, common stockholders can
vote while preferred stockholders generally cannot. But common stockholders are last in line for the

company’s assets in case of default or bankruptcy. Preferred stockholders receive a predetermined

dividend before common stockholders receive a dividend

Means of sourcing funds through equity financing

 Personal Savings

The first place to look for money is your own savings or equity. Personal resources can include

profit-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.

 Life insurance policies

A standard feature of many life insurance policies is the owner’s ability to borrow against the

cash value of the policy. This does not include term insurance because it has no cash value. The

money can be used for business needs. It takes about two years for a policy to accumulate

sufficient cash value for borrowing. You may borrow most of the cash value of the policy. The

loan will reduce the face value of the policy and, in the case of death, the loan has to be repaid

before the beneficiaries of the policy receive any payment.

 Home equity loans

A home equity loan is a loan backed by the value of the equity in your home. If your home is

paid for, it can be used to generate funds from the entire value of your home. If your home has an

existing mortgage, it can provide funds on the difference between the value of the house and the

unpaid mortgage amount. For example, if your house is worth $150,000 with an outstanding

mortgage of $60,000, you have $90,000 in equity you can use as collateral for a home equity

loan or line of credit. Some home equity loans are set up as a revolving credit line from which

you can draw the amount needed at any time. The interest on a home equity loan is tax

deductible.

 Friends and Relatives

Founders of a start-up business may look to private financing sources such as parents or friends.

It may be in the form of equity financing in which the friend or relative receives an ownership

interest in the business. However, these investments should be made with the same formality that

would be used with outside investors.

 Venture Capital

Refers to financing that comes from companies or individuals in the business of investing in

young, privately held businesses. They provide capital to young businesses in exchange for an

ownership share of the business. Venture capital firms usually don’t want to participate in the
initial financing of a business unless the company has management with a proven track record.

Generally, they prefer to invest in companies that have received significant equity investments

from the founders and are already profitable.

They also prefer businesses that have a competitive advantage or a strong value proposition in

the form of a patent, a proven demand for the product, or a very special (and protectable) idea.

Venture capital investors often take a hands-on approach to their investments, requiring

representation on the board of directors and sometimes the hiring of managers. Venture capital

investors can provide valuable guidance and business advice. However, they are looking for

substantial returns on their investments and their objectives may be at cross purposes with those

of the founders. They are often focused on short-term gain.

Venture capital firms are usually focused on creating an investment portfolio of businesses with

high-growth potential resulting in high rates of returns. These businesses are often high-risk

investments. They may look for annual returns of 25 to 30 percent on their overall investment

portfolio.

Because these are usually high-risk business investments, they want investments with expected

returns of 50 percent or more. Assuming that some business investments will return 50 percent or

more while others will fail, it is hoped that the overall portfolio will return 25 to 30 percent.

More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that

typically two investments will yield high returns, six will yield moderate returns (or just return

their original investment), and two will fail.

 Angel Investors

Angel investors are individuals and businesses that are interested in helping small businesses

survive and grow. So their objective may be more than just focusing on economic returns.

Although angel investors often have somewhat of a mission focus, they are still interested in

profitability and security for their investment. So they may still make many of the same demands

as a venture capitalist.

Angel investors may be interested in the economic development of a specific geographic area in

which they are located. Angel investors may focus on earlier stage financing and smaller

financing amounts than venture capitalists.

 Government Grants

Federal and state governments often have financial assistance in the form of grants and/or tax

credits for start-up or expanding businesses.

 Equity Offerings

In this situation, the business sells stock directly to the public. Depending on the circumstances,

equity offerings can raise substantial amounts of funds. The structure of the offering can take

many forms and requires careful oversight by the company’s legal representative.
 Initial Public Offerings

Initial Public Offerings (IPOs) are used when companies have profitable operations, management

stability, and strong demand for their products or services. This generally doesn’t happen until

companies have been in business for several years. To get to this point, they usually will raise

funds privately one or more times.

 Warrants

Warrants are a special type of instrument used for long-term financing. They are useful for start-

up companies to encourage investment by minimizing downside risk while providing upside

potential. For example, warrants can be issued to management in a start-up company as part of

the reimbursement package.

A warrant is a security that grants the owner of the warrant the right to buy stock in the

issuing company at a pre-determined (exercise) price at a future date (before a specified

expiration date). Its value is the relationship of the market price of the stock to the purchase price

(warrant price) of the stock. If the market price of the stock rises above the warrant price, the

holder can exercise the warrant. This involves purchasing the stock at the warrant price. So, in

this situation, the warrant provides the opportunity to purchase the stock at a price below current

market price.
 If the current market price of the stock is below the warrant price, the warrant is worthless

because exercising the warrant would be the same as buying the stock at a price higher than the

current market price. So, the warrant is left to expire. Generally warrants contain a specific date

at which they expire if not exercised by that date.

2) Debt Financing

Debt financing involves borrowing funds from creditors with the stipulation of repaying the

borrowed funds plus interest at a specified future time. For the creditors (those lending the funds to the

business), the reward for providing the debt financing is the interest on the amount lent to the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which

the lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt

does not have collateral and places the lender in a less secure position relative to repayment in case of

default.

Debt financing (loans) may be short term or long term in their repayment schedules. Generally,

short-term debt is used to finance current activities such as operations while long-term debt is used to

finance assets such as buildings and equipment.

Means of sourcing funds through equity financing

 Friends and Relatives

Founders of start-up businesses may look to private sources such as family and friends when

starting a business. This may be in the form of debt capital at a low interest rate. However, if you

borrow from relatives or friends, it should be done with the same formality as if it were borrowed

from a commercial lender. This means creating and executing a formal loan document that

includes the amount borrowed, the interest rate, specific repayment terms (based on the projected

cash flow of the start-up business), and collateral in case of default.

 Banks and Other Commercial Lenders

Banks and other commercial lenders are popular sources of business financing. Most lenders

require a solid business plan, positive track record, and plenty of collateral. These are usually

hard to come by for a start- up business. Once the business is underway and profit and loss

statements, cash flows budgets, and net worth statements are provided, the company may be able

to borrow additional funds.

 Commercial Finance Companies

Commercial finance companies may be considered when the business is unable to secure

financing from other commercial sources. These companies may be more willing to rely on the
 quality of the collateral to repay the loan than the track record or profit projections of your

business. If the business does not have substantial personal assets or collateral, a commercial

finance company may not be the best place to secure financing. Also, the cost of finance

company money is usually higher than other commercial lenders.

 Government Programs

Federal, state, and local governments have programs designed to assist the financing of new

ventures and small businesses. The assistance is often in the form of a government guarantee of

the repayment of a loan from a conventional lender. The guarantee provides the lender

repayment assurance for a loan to a business that may have limited assets available for collateral.

The best known sources are the Small Business Administration and the USDA Rural

Development programs.

 Bonds

Bonds may be used to raise financing for a specific activity. They are a special type of debt

financing because the debt instrument is issued by the company. Bonds are different from other

debt financing instruments because the company specifies the interest rate and when the

company will pay back the principal (maturity date). Also, the company does not have to make

any payments on the principal (and may not make any interest payments) until the specified

maturity date. The price paid for the bond at the time it is issued is called its face value.
 When a company issues a bond it guarantees to pay back the principal (face value) plus interest.

From a financing perspective, issuing a bond offers the company the opportunity to access

financing without having to pay it back until it has successfully applied the funds. The risk for

the investor is that the company will default or go bankrupt before the maturity date. However,

because bonds are a debt instrument, they are ahead of equity holders for company assets.

3) Lease

A lease is a method of obtaining the use of assets for the business without using debt or equity

financing. It is a legal agreement between two parties that specifies the terms and conditions for the

rental use of a tangible resource such as a building and equipment. Lease payments are often due

annually. The agreement is usually between the company and a leasing or financing organization and not

directly between the company and the organization providing the assets. When the lease ends, the asset

is returned to the owner, the lease is renewed, or the asset is purchased.

A lease may have an advantage because it does not tie up funds from purchasing an asset. It is

often compared to purchasing an asset with debt financing where the debt repayment is spread over a

period of years. However, lease payments often come at the beginning of the year where debt payments

come at the end of the year. So, the business may have more time to generate funds for debt payments,

although a down payment is usually required at the beginning of the loan period.
 Effective Cash Flows

Whether it is a new business or an existing one, cash flow management will always be a significant

component contributing to the success of an enterprise’s operation. No business can afford to ignore its

cash flow. Monitoring this is like monitoring your pulse – it’s a crucial health check for your business.

Indeed, more than a third of SMEs cite issues with cash flow as a barrier to their growth.

What is cash flow?

Cash flow refers to the movement of money in and out of your business. Ideally, you want to try

to have a positive cash flow – meaning that more money is coming in to the business in sales or new

orders than goes out in bills and expenses. If you have a positive cash flow, your business will be able to

settle its bills and invest in growth. If it has a negative cash flow, it will need to find an alternative

source of income to be able to pay its debts and need to work on turning this around.

So, if you want to work out the net cash flow, you just add up all of your cash payments over a

set period (typically a month) and take that away from your cash receipts. It’s important not to get too

hung up on one particular month, however. Your cash flow can be more accurately judged over a period

of three months or more since most businesses will, naturally, have peaks and troughs.

While your turnover might be a nice big number that gives you confidence that your business is

doing well, it’s the cash flow that offers a better insight into how well your business is managing. As the

old saying goes – turnover is vanity, profit is sanity and cash flow is reality.
 What happens if you don’t keep on top of your cash flow?

Failing to monitor and manage your cash flow puts your business at risk and could lead to a

range of different problems. Here are some of the main issues you might face:

 Too much stock. If you suddenly receive high demand for a product, it’s tempting to order a high

volume of material to service that demand. However, if that demand then changes you could be left with

far too much stock and, potentially, debt from ordering the materials. Ordering too much stock might

also leave you lumbered with materials that become obsolete and difficult to sell.

 Long payment terms. Lengthy payment terms can often leave you with long stretches of time when no

money comes in. Any unseen issues, right from a fire at the office to the need to replace a laptop, can

then be problematic due to a shortage of cash while you wait for the money to arrive. There’s also the

possibility of bad debt, which is when customers do not pay at all.

 Overspending. It’s very tempting to go on a spending spree when you win a new client – snapping up

everything from fancy orthopaedic chairs to an office ping pong table. However, you need to remember

that you haven’t actually got the money until they’ve paid you. Spending money that you don’t have is

never the best idea.

 Overtrading. Just as with stock, it’s easy to get carried away with your business outlook after securing

a big order. Employing more staff or expanding to more locations might seem like a good idea to grow

your business, but you need to have the cash flow to back this up. While your profits can vary, your rent
and salaries won’t, meaning that you need to be able to withstand short term pressure on your finances if

you want to grow your personnel and premises.

Cash flow statement

Given the importance of cash flow management, it might well help to produce a statement that

demonstrates this. A cash flow statement looks a lot like a profit and loss statement and the balance

sheet. It should aim to look at how cash moves in and out of the business which, in turn, allows you to:

 Consider how funds move through the business

 What impact cash flow has on the running of the business

 How payments reconcile with cash balances and values

In essence, you should see a cash statement as a condensed version of the balance sheet that you

produce once a year. The end result of your statement should be a ‘Net Cash’ figure, which is the

ultimate figure derived from all the other numbers in your report.

What to put in your cash flow statement?

A cash flow statement should be made up of three categories: operating, investing and financing.

Operating: This is your net income, plus or minus increases or decreases in your current assets and

liabilities and expenses.

Investing: This figure reflects any increases or decreases in long or fixed term assets (independent of

accumulated depreciation).
Financing: This reflects any increases or decreases in long term liabilities/debt, owners’ capital or

dividends.

Once you have these three figures, you either add or take them away from your beginning cash balance

to get your overall net cash balance.

Why produce a cash flow statement?

As well as giving a summary of how much cash is available for operations, the cash flow

statement also details the ways in which the business is generating cash. In turn, this reveals a lot about

how (or, indeed, if) growth is taking place, i.e. whether it is through increasing debt, income etc. This

sort of information is important if you want to be able to plan ahead. You might even wish to make a

cash flow forecast, based on how you think changes you are making to the business will be reflected in

future cash flow statements.

This statement is a way of ensuring that you are going to be able to pay all of your bills. As a

start-up, it might indicate when you need to get an alternative source of finance as you find your feet,

while seasonal businesses can use this to track what happens during peak season and quieter times.
 Bonds and Stocks

What is a Bond?

A bond is a debt investment in which an investor loans money to an entity (typically corporate or

governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Bonds are used by companies, municipalities, states and sovereign governments to raise money and

finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.

Bonds are commonly referred to as fixed-income securities and are one of the three main generic asset

classes, along with stocks (equities) and cash equivalents. Many corporate and government bonds are

publicly traded on exchanges, while others are traded only over-the-counter (OTC).

How Bonds Work

When companies or other entities need to raise money to finance new projects, maintain ongoing

operations, or refinance existing other debts, they may issue bonds directly to investors instead of

obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states

the interest rate (coupon) that will be paid and the time at which the loaned funds (bond principal) must

be returned (maturity date).

The issuance price of a bond is typically set at par, usually $100 or $1,000 face value per individual

bond. The actual market price of a bond depends on a number of factors including the credit quality of

the issuer, the length of time until expiration, and the coupon rate compared to the general interest rate

environment at the time.

Example

Because fixed-rate coupon bonds will pay the same percentage of its face value over time, the market

price of the bond will fluctuate as that coupon becomes desirable or undesirable given prevailing interest

rates at a given moment in time. For example if a bond is issued when prevailing interest rates are 5% at

$1,000 par value with a 5% annual coupon, it will generate $50 of cash flows per year to the bondholder.

The bondholder would be indifferent to purchasing the bond or saving the same money at the prevailing

interest rate.

If interest rates drop to 4%, the bond will continue paying out at 5%, making it a more attractive

option. Investors will purchase these bonds, bidding the price up to a premium until the effective rate on

the bond equals 4%. On the other hand, if interest rates rise to 6%, the 5% coupon is no longer attractive

and the bond price will decrease, selling at a discount until it's effective rate is 6%.

Because of this mechanism, bond prices move inversely with interest rates.

Characteristics of Bonds

 Most bonds share some common basic characteristics including:

 Face value is the money amount the bond will be worth at its maturity, and is also the reference

amount the bond issuer uses when calculating interest payments.

 Coupon rate is the rate of interest the bond issuer will pay on the face value of the bond,

expressed as a percentage.

 Coupon dates are the dates on which the bond issuer will make interest payments. Typical

intervals are annual or semi-annual coupon payments.

  Maturity date is the date on which the bond will mature and the bond issuer will pay the bond

holder the face value of the bond.

 Issue price is the price at which the bond issuer originally sells the bonds.

Two features of a bond – credit quality and duration – are the principal determinants of a bond's

interest rate. If the issuer has a poor credit rating, the risk of default is greater and these bonds will tend

to trade a discount. Credit ratings are calculated and issued by credit rating agencies.

Bond maturities can range from a day or less to more than 30 years. The longer the bond maturity, or

duration, the greater the chances of adverse effects. Longer-dated bonds also tend to have

lower liquidity. Because of these attributes, bonds with a longer time to maturity typically command a

higher interest rate.

When considering the riskiness of bond portfolios, investors typically consider the duration (price

sensitivity to changes in interest rates) and convexity (curvature of duration).

Bond Issuers

There are three main categories of bonds.

 Corporate bonds are issued by companies.

 Municipal bonds are issued by states and municipalities. Municipal bonds can offer tax-free

coupon income for residents of those municipalities.

 U.S. Treasury bonds (more than 10 years to maturity), notes (1-10 years maturity) and bills (less

than one year to maturity) are collectively referred to as simply "Treasuries."

Varieties of Bonds

 Zero-coupon bonds do not pay out regular coupon payments, and instead are issued at a discount

and their market price eventually converges to face value upon maturity. The discount a zero-

coupon bond sells for will be equivalent to the yield of a similar coupon bond.

 Convertible bonds are debt instruments with an embedded call option that allows bondholders to

convert their debt into stock (equity) at some point if the share price rises to a sufficiently high

level to make such a conversion attractive.

 Some corporate bonds are callable, meaning that the company can call back the bonds from

debtholders if interest rates drop sufficiently. These bonds typically trade at a premium to non-

callable debt due to the risk of being called away and also due to their relative scarcity in

today's bond market. Other bonds are putable, meaning that creditors can put the bond back to

the issuer if interest rates rise sufficiently.

The majority of corporate bonds in today's market are so-called bullet bonds, with no embedded

options whose entire face value is paid at once on the maturity date.

What is a Stock?

A stock is a type of security that signifies ownership in a corporation and represents a claim on

part of the corporation's assets and earnings.

There are two main types of stock: common and preferred. Common stock usually entitles the owner to

vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting

rights, but has a higher claim on assets and earnings than the common shares. For example, owners of
preferred stock receive dividends before common shareholders and have priority in the event that a

company goes bankrupt and is liquidated.

Types of Stocks

1) Common Stock

When people talk about stocks they are usually referring to common stock. In fact, the great

majority of stock is issued is in this form. Common shares represent a claim on profits (dividends) and

confer voting rights. Investors most often get one vote per share-owned to elect board members who

oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, has tended to yield higher

returns than corporate bonds. This higher return comes at a cost, however, since common stocks entail

the most risk including the potential to lose the entire amount invested if a company goes out of

business. If a company goes bankrupt and liquidates, the common shareholders will not receive money

until the creditors, bondholders and preferred shareholders are paid.

2) Preferred Stock

Preferred stock functions similarly to bonds, and usually doesn't come with the voting rights (this

may vary depending on the company, but in many cases preferred shareholders do not have any voting

rights). With preferred shares, investors are usually guaranteed a fixed dividend in perpetuity. This is

different from common stock which has variable dividends that are declared by the board of directors

and never guaranteed. In fact, many companies do not pay out dividends to common stock at all.
 Another advantage is that in the event of liquidation, preferred shareholders are paid off before

the common shareholder (but still after debt holders and other creditors). Preferred stock may also be

“callable,” meaning that the company has the option to re-purchase the shares from preferred

shareholders at any time for any reason (usually for a premium). An intuitive way to think of these kinds

of shares is to see them as being somewhat in between bonds and common shares.

Common and preferred are the two main forms of stock; however, it's also possible for

companies to customize different classes of stock to fit the needs of their investors. The most common

reason for creating share classes is for the company to keep voting power concentrated with a certain

group. Therefore, different classes of shares are given different voting rights.

How Stocks Works

To start with, stock holders do not own corporations; they own shares issued by corporations.

But corporations are a special type of organization because the law treats them as legal persons. In other

words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a

corporation is a “person” means that the corporation owns its own assets. A corporate office full of

chairs and tables belong to the corporation, and not to the shareholders.

This distinction is important because corporate property is legally separated from the property of

shareholders, which limits the liability of both the corporation and the shareholder. If the corporation

goes bankrupt, a judge may order all of its assets sold – but your personal assets are not at risk. The

court cannot even force you to sell your shares, although the value of your shares will have fallen

drastically. Likewise, if a major shareholder goes bankrupt, she cannot sell the company’s assets to pay

off her creditors.

 What shareholders own are shares issued by the corporation; and the corporation owns the assets.

So if you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that

company; it is instead correct to state that you own 100% of one-third of the company’s shares.

Shareholders cannot do as they please with a corporation or its assets. A shareholder can’t walk out with

a chair because the corporation owns that chair, not the shareholder. This is known as the “separation of

ownership and control.”

So what good are shares, then, if they aren’t actually the ownership rights we think they are?

Owning stock gives you the right to vote in shareholder meetings, receive dividends (which are the

company’s profits) if and when they are distributed, and it gives you the right to sell your shares to

somebody else.

If you own a majority of shares, your voting power increases so that you can indirectly control

the direction of a company by appointing its board of directors. This becomes most apparent when one

company buys another: the acquiring company doesn’t go around buying up the building, the chairs, the

employees; it buys up all the shares. The board of directors is responsible for increasing the value of the

corporation, and often does so by hiring professional managers, or officers, such as the Chief Executive

Officer, or CEO.

For ordinary shareholders, not being able to manage the company isn't such a big deal. The

importance of being a shareholder is that you are entitled to a portion of the company's profits, which, as

we will see, is the foundation of a stock’s value. The more shares you own, the larger the portion of the
profits you get. Many stocks, however, do not pay out dividends, and instead reinvest profits back into

growing the company. These retained earnings, however, are still reflected in the value of a stock.

Importance of Stocks

Without knowing the proper value of stocks, investors are hard-pressed to find the right time to

buy or sell shares. Investors might miss out on buying and selling opportunities if they base investment

decisions solely on a stock's market value. There are ways to evaluate the stock's company so investors

reduce their chances of selling stocks too soon and missing out on future profits or buying a stock priced

to high for what it is worth.

A) Market Value

A stock's market value fluctuates throughout the course of a trading session based on the supply

of shares coupled with investor demand. The market value lets an investor know whether shares are

currently affordable. The value also becomes important when using trading strategies. For example,

investors have the option to use buy and sell stop orders in the market, which are price limits for buying

or selling shares. These orders can prevent financial losses or allow an investor to secure market gains,

according to the U.S. Securities and Exchange Commission.

B) Profiting

Without knowing when a stock is too richly priced, or over-valued, an investor may miss out on

an opportunity to cash-in on an investment and profit. Worse, an investor might wind up owning a stock

with a price that has nowhere to go but down. This became the case in 2012 when the U.S. Federal
Reserve provided a stimulus to the economy. As a result, more than half the stocks in the market became

priced at more than they were worth, according to ValuEngine data provided by Forbes.

C) Opportunity

By locating stocks in the market that are under-valued, or priced below where they are worth

based on certain metrics, investors can seize an opportunity to earn profits. After the financial crisis in

2008, the stock market rebounded. For the three-year period ending in April 2012, the S&P; 500, which

represents some of the largest companies in the stock market, advanced more than 100 percent,

according to MSN Money.

D) P/E Ratio

By overlooking a company's price-to-earnings ratio, an investor could miss out on the true value

of stocks and wind up investing in the wrong companies. A P/E ratio is a measure of how much

investors are willing to pay for a stock relative to the company's earnings. It is useful when comparing

the stock price of one company to another that trades in the same sector. For five decades leading up to

2009, the average P/E ratio was 16.4, according to the Bloomberg website. The P/E ratio is calculated by

dividing a stock's market value by average earnings per share over a period of time, such as the past

year.
 Investment and Disbursement

What is an 'Investment'?

An investment is an asset or item that is purchased with the hope that it will generate income or

will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not

consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset

purchased with the idea that the asset will provide income in the future or will be sold at a higher price

for a profit.

The term "investment" can be used to refer to any mechanism used for the purpose of generating

future income. In the financial sense, this includes the purchase of bonds, stocks or real estate property.

Additionally, the constructed building or other facility used to produce goods can be seen as an

investment. The production of goods required to produce other goods may also be seen as investing.

Taking an action in the hopes of raising future revenue can also be an investment. Choosing to

pursue additional education can be considered an investment, as the goal is to increase knowledge and

improve skills in the hopes of producing more income.

Importance of Investment

Every branch of knowledge has its own contributions that made a turning point in the historical

lanes of human beings. In mechanics it is wheel, in science it is fire. In political science it is vote and in

economics it is money. Money is the queen among all these fundamental discoveries. Money is anything
that is generally acceptable as a means of exchange and that at the same time act a store of value. So

there is no question in the fact that money is important and money does matter.

Until the middle part of twentieth century, the whole economic system was run on the basis of

classical economic principles associated with the names of Adam Smith, David Ricardo, T R Malthus, J

B Say, Alfred Marshall etc. their economic doctrines enjoyed wide spread authority during the late

eighteenth and nineteenth century. According to them, money acts as a medium of exchange. It means

that money has only one function that is transaction. But after the Great depression of 1930’s, an

intellectual giant John Maynard Keynes, a favorite student of Alfred Marshall in Cambridge University

came with a new set of thoughts and ideas. He published a book named ‘General Theory of

Employment, Interest and Money’ in 1936. it has created a great revolution in economic history and

became a landmark in modern economic thinking. In this theory Keynes examined the sore of value

function of money along with transaction function.

According to him demand for money arises due to three motives. They are transaction motive,

precautionary motive and speculative motive.

1. Transaction motive

It refers to the demand for money for the current transaction of the people. People hold cash in

order to bridge the interval between receipt of income and the expenditure. This amount will depend

upon the interval at which income is received. The businessmen and entrepreneurs also will keep a

portion of their resource in ready cash to meet the current needs. Keynes calls this as business motive.

The amount hold in liquid form will depend upon the business turnover. Transaction demand for money

is independent of rate of interest and it will remain constant at a particular level of income.
2. Precautionary motive

It refers to the desire of the public to hold cash balances for meeting unforeseen or unpredictable

contingencies such as unemployment, sickness, accidents etc. The amount of money hold under this

motive will depend on the nature of individuals’ income.

3. Speculative motive

It refers to the desire to hold one’s resources in liquid form in order to take advantage in market

movements regarding future changes in price and rate of interest. There is an inverse relation between

rate of interest and people’s tendency to spend money.

Precautionary and speculative motive induce people to save money. When people save, banks

will lend this amount to businessmen for investment. Thus there is a very close relationship between

savings and investment. While we understand the importance of savings and investment in one’s life it is

very essential to understand the interconnection between them.

Savings refers to that part of income which is not consumed. On the other hand by the term

investment we mean an addition to the stock of physical capital. Savings and investment are two crucial

economic variables by which we can measure a person’s physical quality of life and standard of living.

Everyone can agree that saving money as early as possible will help one and his family to achieve more

stable life than someone who has no savings. Long term habit of saving money is a way of protecting

someone from natural adversity that comes in his life.

What is 'Disbursement'?

Disbursement is the act of paying out or disbursing money, such as money paid out to run a

business, cash expenditures, dividend payments, and/or the amounts that a lawyer might have to pay out
on a person's behalf in connection with a transaction. Disbursing money is part of cash flow. If cash

flow is negative, meaning that disbursements are higher than revenues, it can be an early warning of

potential insolvency.

A disbursement is a payment made by a company in cash or cash equivalents during a set time

period. A bookkeeper records the transactions and posts them to ledgers, such as the general ledger and

accounts payable ledger. Each entry includes the date, payee name, amount debited or credited, payment

method, purpose of the payment, and its effect on overall cash balance. Common accounts in the ledger

depend on the business. For example, a retailer has payments for inventory, accounts payable and

salaries. A manufacturer has transactions for raw materials and production costs.

Disbursements measure the money flowing out of a business and may differ from profit or loss.

For example, a company using the accrual method reports expenses when they occur, not when they are

paid, and it reports income when earned, not paid. Managers use the ledgers to determine how much

cash is disbursed, and they track its use to determine spending ratios. For example, management can see

how much cash is spent on inventory compared to other bills. Since the ledger records the check

numbers of the checks issued, managers can determine whether checks are missing or written

incorrectly. If earnings do not come as needed to cover expenses, a profit is still reported while cash is

running low, which can lead to insolvency.

Examples of Disbursements

An example of a disbursement is when a company's attorney makes payments to third parties for

court or medical fees, private investigators, couriers or expert reports while preparing a case.
Disbursements can become costly in cases involving expert reports for establishing evidence, especially

in personal injury cases when serious injuries have long-term effects and must be evaluated

immediately. These reports enable a more accurate determination of the client’s losses and create an

understanding of claimed damages. The attorney notifies the client and the insurance company before

incurring high disbursement costs, and the client must reimburse the attorney.

A student loan disbursement is the paying out of loan proceeds to a borrower, which is the

student. Schools and loan servicers notify students of the disbursements in writing, including the amount

of the loan and its expected disbursement date. They then disburse Federal and private student loans,

typically two or more times during the academic year. The student receives credit to his account to pay

tuition and fees, and receives the balance by check, direct deposit or another method.
 International Corporations that succeeded in applying their financial strategies

Alphabet, Inc. (Google)

Alphabet, Inc. is the holding company of Google, Access, Calico , CapitalG, GV Nest, Verily,

Waymo and X. Google’s core products such as Search, Android, Maps, Chrome, Youtube, Google Play

and Gmail which each have over one billion monthly active users. Google generate revenues primarily

by delivering both performance advertising and brand advertising.

With the type of industry that Google serves, one of their competitive advantage over

competitors in the market is their dominance with massive amount of information. Google can target

advertisements or adapt its products to its users’ need better than any competitor, because it has both

smarter algorithms and more information about its users.

One of the key financial strategy that Alphabet, Inc. (Google) uses is its excellent acquisition

capabilities. According to CB Insights since 2012 to 2016, Google acquired more than 103 companies

where it averaged 1.7 acquisitions per month compared with Microsoft, Facebook and Apple which had

58, 49 and 50 acquisitions respectively.

Through the acquisition of other companies, Alphabet acquires new skills, technologies, patents

and improves its own products and services which allow the company to grow with less effort in

Research and Development. Being a technology company, they had to heavily invest with R&D to

improve and create new products. Often, most of the company acquires already finished products that

grow into successful businesses like Youtube.

Ikea

Ikeas is a multinational group, that designs and sells ready to assemble furniture, kitchen

appliances and home accessories. It has been the world’s largest furniture retailer since 2008. Known for

its simple product design; its massive, friendly retail stores; and its very low prices, the company has

built a remarkable level of customer loyalty around the world.

According to the article of Caglar, Kosteloo and Kleiner, during the global recession in 2008

Ikea had to change its financial strategy to maintain its position in the market for long-term growth.

Being known as a company that sells furniture in a lower price, Ikea have decided to reduce their cost by

separating productive investments and unnecessary expenses. Instead of cutting cost in manpower which

will weaken their product and service advantage, Ikea lowered operational cost where customers can’t

notice and will not affect the product and service quality offered to client like not having fancy offices;

employees are travelling in economy class and let them stay at moderately priced hotels.

Wendy’s Company

Wendy’s is the world’s third largest quick service hamburger company. The Wendy’s system

includes more than 6,500 franchise and Company restaurants in U.S. and 29 other countries and U.S.

territories worldwide.

In 2015, one of their financial strategy is to sell 380 and 100 company-operated restaurants in US

and Canada respectively to franchisees. Through the System Optimization initiative of Wendy’s, it

shifted from a company operated model to a franchise model where they no longer receive its former

share of the entire revenues earned. Instead, the company earns royalties, fees and rents from the leased

properties from the franchise. These sales are expected to generate $400 million–$475 million.
 Given the shift of Wendy’s source of revenue, it also lowered operational cost for Wendy’s since they do

not have to maintain all the company-operated restaurants which in turn generated a net gain of $37 million as of

2014 under the System Optimization initiative.

Whirlpool Corporation

Whirlpool Corporation is an American multinational manufacturer and marketer of home

appliances

Management of dividends and stock price is one of the key financial strategies used by

companies. Whirlpool Corporation, an example of company that does not face rapid growth, must

support the value of their stock by offering consistent dividends. Instead of raising dividends when

profits are high, a popular financial strategy is to use excess cash (or even use debt) to buy back a

company’s own shares of stock. During 2005, for example, 1,012 U.S.- based publicly traded companies

declared $446 billion worth of stock repurchase plans. Because stock buybacks increase earnings per

share, they typically increase a firm’s stock price and make unwanted takeover attempts more difficult.

Such buybacks do signal, however, that either management may not have been able to find any

profitable investment opportunities for the company or that it is anticipating reduced future earnings.

AT&T

AT &T is an American multinational telecommunications conglomerate.

A rather novel financial strategy is the selling of a company’s patents. AT&T has been selling

patents for products that they no longer wish to commercialize or are not a part of their core business.

AT&T recently sold its Watson technology program (a speech recognition platform) and other related

patents to Interactions Corporation, with an undisclosed amount of selling price.