Organization Funding

By Samit Banerjee
19-02-2019
722

Question

Assess the various methods through which organizations access funding and when to use different types of funding?

Answer:

Funds are one of the most integral and inseparable entities for the smooth running of any organization. Starting from the inception onwards, an organization requires funds for its operations related to the smooth conveyance of its deliverance of services or goods to its prospective clients and customers. The major requirement of funding arises at the time of incorporation of the organization, times of crisis due to inflation or other economical unwanted trajectories, and in the process of maintaining all types of operational activities including payment of staff and workers.

Access of funding at the time of incorporation of business:

At the time of incorporation of any business organization, it is a great challenge for the upcoming entrepreneurs to arrange funds to commence their startup ventures. At this point in time, they can rely upon the following methods to raise capital for their initiatives:

a.       Use their savings: Entrepreneurs can utilize the funds they have in their savings to start up with their initiative of incorporating a new business entity. As their savings fund is completely under their control, there stands no question of any type of collaborative paperwork or permissions to access that fund. The individual himself is the stakeholder of the amount he or she accesses or utilizes in the venture.

b.      Go for limited liability partnerships: When funds accumulated in the savings of an individual do not suffice the expenses of the startup of the business organization, then he or she might enter into limited liability partnerships with trusted and reliable persons known. By this method, the owner of the organization declares an equivalent share of the profit earned from the business according to the amount of investment his or her perspective partner wills to do. Suppose the total setup cost of the venture is Rs. 1,00,000 and the owner has the credibility to invest Rs. 60,000 for his initiatives. He approaches one of his acquaintances and asks him or her to collaborate in the initiative with an investment of Rs. 40,000. In this case, if his acquaintance agrees to enter the partnership by investing Rs. 40,000, he or she is investing 40% of the net investment, which makes him or her liable to hold a 40% share of the annual profit earned by the organization.

c.       Apply for Government Business funding methods: The government announces various programmes and initiatives to promote business in the private sector, which includes disbursal of financial assistance for starting up of new business ventures. With basic eligibility factors, these programmes are helpful for individuals in accessing funds to start new business expeditions.

Access to funding for operational management:

An organization requires running capital or working capital for smooth propagation of business operations. It includes expenses related to office maintenance, advertisements and promotions, sales and marketing, machinery, travel expenses, and salary and wages. Although at the time of incorporation, all the projections and calculations related to meet these expenses are made beforehand, but yet, one can never tackle with miscellaneous expenses.

To meet monthly expenses like utility bills, salaries and wages, an organization relies upon the monthly profit, which it can gain by extending the availability of its services or goods in the market. The profit fund is allotted in such a way that it can meet all the necessary expenses and bring net profit for the entrepreneur too.

For annual expenses like Annual Maintenance Contracts, annual bonus, annual fees to lawyers and chartered accountant firms, organization relies upon the growth and saving funds of the entrepreneurs and the organization account on a whole.

Access of funding at times of crisis:

At times of crisis like accidents in production units, sudden change in market trend leading to scarcity of demand, unwanted increase in the numbers of sundry debtors and creditors or unwanted increase in miscellaneous expenses, an organization has to tackle the situation rather than arranging funds for them. In cases of accidents, the organization must opt to take help of the guarantee and warranty certifications of machineries and avail health insurance benefits for providing medical assistance to injured workers. Organization can take help from banks and financial organization using overdraft or cash-credit facilities to deal with sundry creditors and debtors.  

References:

Aryya, Gangopadhyay (2001-07-01). Managing Business with Electronic Commerce: Issues and Trends: Issues and Trends. Idea Group Inc (IGI). ISBN 9781591400073.

Stephen. Blyth, (2013). Introduction to Quantitative Finance. Oxford University Press, USA. p. 157. ISBN 9780199666591.



Related Tutorials