There would be many reasons for company sourcing money. The traditional areas of need may be for business expansion acquiring new machinery or constructing new building (Short, 2005). The research and development of new products also need tremendous funds. Namely, financing is an important activity in the operation of one company. Company can choose both internal and external ways for financing. It means that there would be many ways for company to source money. Because different companies have different situations, so it is necessary for companies to make decisions in a comprehensive consideration (Biais & Gollier, 1997). Taking the Madison PLC as an example, this report will make an explanation on the advantages and disadvantages about different source of finance and the efficient working capital management. Based on the expansion proposals of the company, this report will use different techniques which include NPV and IRR to make an evaluation. The report also using a ratio analysis to evaluates two companies for making a merger decision.
Different Sources of Funding For a Company
The sources of finance for business can be classified as internal and external considering the patterns. The internal financing includes the retained earnings. While the external financing include bank borrowing, share issues and right issues from capital markets, government sources, franchising and venture capital.
- Retained Earnings
The most significant advantage of retained earnings is cheap since it would not generate interest expenses from this source. On the other words, using retained earnings would not need to a payment of cash. Meanwhile, the company does not need take obligations to paying back their own money since it can safely for business (Thirumalaisamy, 2013). In fact, using retained earnings also is good for their shareholders. The reason is that the shares reserved in the company may get appreciation in the market than bonus shares. However, this method of financing also has disadvantages. Because shareholders need to be paid a reasonable dividend which should meet their expectations for the company, thus, the policy for using retained earning must be more rigorous (Consler & Lepak, 2012).
- Bank Borrowing
Bank borrowing is one of the important sources of financing for companies. Short term bank lending is frequently used, although the medium-term lending is more common. The advantage for bank borrowing is that it can be timely for company when need finance (Lookman, 2009). But the bank borrowing is charged interest