Sources of Finance

If you acquire a new car, you become the proud owner of a new asset: the car. You will be only too aware that the acquisition of the car must be funded in some way either out of savings or by borrowing the money. The actual purchase may be made out of your bank account, but you have to ensure there are sufficient funds in your account at the time of purchase.

Similarly for a business, if the assets employed in a business increase then that increase in assets must be funded in some way. As with the individual, a company has choices about how to fund the acquisition of assets. Over time the business has the choice between:

• retaining the profits it has made in the business rather than paying them out to shareholders

• going to its shareholders and asking them to put more money into the business

• borrowing from the bank or issuing debentures.

Let us take each of these three methods, using an example to illustrate the options open to a company. The financial statement of Miah Enterprises plc, for the end of a year which we will call Year X, is shown in Table 4.19

Table 4.19: Miah Enterprises plc: financial statement

The left-hand side of Table 4.19 shows the profit and loss account for Miah Enterprises for the year to 31 December Year X. There are two headings for payments made to the providers of funding for the...