Business financing

An important function of business is financing, that is the way business raises and monitors funds. Most organizations have finance departments or a manager in charge of financial operations.

Most of the money used by business comes from the sale of its products and services. As these funds come from within the firm they are described as internal funds. The rest must come from outside and is described as external funds.

As a firm sells its products or services it receives money, which it uses to meet its expenses. One of these expenses is depreciation, which represents the cost of replacing assets (like tools, machinery, and buildings) that wear out. Typically business uses internal funds to cover the cost of depreciation.

Business can raise external funds in two ways: it can issue shares (stock) in exchange for money or property (equity funding), or by borrowing in exchange for bonds (notes), that is debt funding. Both stocks and bonds are negotiable, that is one can buy and sell them at the security exchange (Stock Exchange).

Banks make loans to corporations, organizations, to small companies and individuals. For this service banks always charge interest. To decide whether a business should receive a loan the bank examines its financial statement. If the company is eligible for a loan, it may choose a long-term loan or a short-term loan.

For short-term loans the principal (the amount borrowed) must be repaid within a year. Long-term loans mature (come due) in more than a year. Short-term loans are used to finance the everyday costs of doing business such as wages and salaries, raw materials, etc. Long-term loans are used to buy equipment, buildings and other expensive items.

The amount of money that company can borrow from a bank is a line of credit. This top amount of customer’s credit is based on the profits and earnings of a business.

Two of the most important pieces of financial information on business are the balance sheet and the income statement. The balance sheet summarizes the firm’s assets (what it owns), the firm’s liabilities (what it owes) and its net worth (the difference between the two sums) at a given time. The income statement summarizes the firm’s revenues, costs and the difference between the two (the profit or loss) over a period of time.

Bank accounts

There are two reasons for using bank accounts: convenience and safety in money use provided by a current account (US: checking account) at a bank; and small but regular interest that is provided by a deposit account (US: savings account) if you want to save your money for a long period of time.

The checking account is an account for receiving money from other people (wages and salaries paid into the account or different amounts of money received from the customers). It is money that a customer deposits in order to use that money to write checks, so it is the account for paying your bills, rent, subscriptions and other expenses. If you keep your money in your checking account you can go shopping without having to carry cash around with you. When you want to make a payment you simply fill in the amount on a check and hand it together with your check card to the cashier in the shop.

A checking account holder can use all banking services: send money abroad, buy and sell stocks, place standing orders or authorize direct debits, and of course, to apply for an overdraft or other loans. Checking account is called demand deposit, that is a customer can withdraw the money without waiting for any time.

The savings account is the account for money that you do not need for day-to-day expenses and want to save it and to receive some interest. When you open your savings account you receive a passbook or savings book. Every deposit or withdrawal is entered into it by a teller. So you have a complete written record of all transactions with your account. The interest that your money earns is also recorded.

Any money put into your savings account begins earning interest from the day it was deposited. The interest rate can vary from time to time according to the market rate. You can pay money into your savings account at any branch of the bank.

There is a variety of a deposit account – time deposit (or certificate of deposit – CD) which allows customers to deposit larger amounts of money for a definite fixed term and earns a higher rate of interest. If you withdraw your money beforehand you will lose your interest rate.

Savings account is free of charge; it earns interest to its holder, so that makes it profitable for customers.

But checking account charges different fees for bookkeeping of the account, service charges for different transactions. Every month a checking account holder receives a monthly statement telling him exactly what has been debited or credited to his account.

There are new accounts – NOW and Super NOW accounts that offer their customers all the convenience of a checking account with the income advantages of a savings account.