Internal and external sources of investment financing. Own sources of investment financing

Entrepreneurial activity is an independent activity carried out at one’s own risk, aimed at systematically obtaining profit from the use of property, sale of goods, performance of work or provision of services by persons registered in this capacity in the prescribed manner.

Own sources are formed in the process of economic activity and play a significant role in the life of any enterprise, since they determine its ability to self-finance. It is obvious that an enterprise that is able to fully or substantially cover its financial needs from its own sources receives significant competitive advantages and favorable opportunities for growth by reducing the costs of attracting additional capital and reducing risks.\

The main source is the enterprise's own capital. It includes: authorized, additional, reserve capital, retained earnings, special purpose funds, gratuitous receipts and government subsidies, and other reserves.

In the future, own sources of financing are net profit, depreciation charges, sale or lease of unused assets, etc.

In modern conditions, enterprises independently distribute the profits remaining at their disposal. Rational use of profits involves taking into account factors such as the further development of the enterprise, as well as respecting the interests of owners, investors and employees. In general, the more profits are used to expand business activities, the less the need for additional financing.

Another important source of self-financing for enterprises is depreciation charges. They are included in the costs of the enterprise, reflecting the depreciation of fixed and intangible assets, and are received as part of cash for sold products and services. Their main purpose is to ensure not only simple, but also extended reproduction.

It is also possible to attract additional financial resources into economic circulation through the sale or lease of unused fixed and current assets. However, such transactions are one-time in nature and cannot be considered as a regular source of funds.

Despite the advantages of own sources of financing, their volumes, as a rule, are insufficient to expand the scale of economic activity, implement investment projects, introduce new technologies, etc. In this regard, there is a need to additionally attract own funds from external sources.

Sincerely, Young Analyst

Underown investments mean funds of legal entities and individuals allocated for financing on profit-sharing terms. Own sources of investment include: the reinvested part of net profit, depreciation charges, insurance compensation for losses, etc. Let's consider the main sources of own financing of investment resources.

Authorized capital - the amount of funds provided by the owners to ensure the statutory activities of the enterprise. Its content depends on the legal form of the enterprise.

The authorized capital is the main and, as a rule, the only source of financing at the time of creation of a commercial organization. Its value is announced by enterprises, and changes in the size of the authorized capital are allowed in the manner prescribed by current legislation and constituent documents. The authorized capital of an organization determines the minimum amount of its property, guaranteeing the interests of creditors.

Extra capital as a source of funds for an enterprise, it reflects the increase in the value of non-current assets as a result of the revaluation of fixed assets and other material assets with a useful life of more than 12 months. It may also include the amount of excess of the actual placement price of shares over their par value (share premium of the joint stock company).

Reserve capital can be created at the enterprise either without fail, or if it is provided for in the constituent documents. The creation of reserve funds is mandatory for open joint-stock companies and enterprises with foreign capital.

Net profit - funds remaining with the enterprise after payment of all obligatory payments. Net profit allocated for investment can either be accumulated in an accumulation fund (or other funds for a similar purpose), or reinvested in the assets of the enterprise as undistributed profit balance.

Depreciation deductions. Depreciation is the process of transferring the value of fixed assets during their standard service life to the cost of manufactured products. Depreciation is charged to reimburse the costs of acquiring fixed assets, and accordingly, depreciation charges are intended to invest in replacing fixed assets retired due to physical and moral wear and tear. The amount of accumulated depreciation depends on the value of the enterprise's fixed assets and the methods used to calculate depreciation. Depreciation charges at the enterprise should be used to finance capital investments.

Depending on the method of formation, the enterprise’s own sources of financing are divided into internal and external (attracted). The main internal sources of financing of any enterprise are net profit, depreciation charges, sale or rental of unused assets, etc. However, their volumes are usually insufficient to expand the scale of activities, implement projects, introduce new technologies, etc. Therefore, the need arises attracting own funds from external sources.

Own sources include all internal sources and issue of shares (external source), the remaining sources are borrowed funds. The ratio of own and borrowed sources forms the structure of investment financing and depends on factors such as the development of the financial market, the technical complexity and duration of the project, the established practice of implementing projects at the enterprise, the level of financial stability of the enterprise, etc.

The choice of sources of investment financing should be focused on optimizing their structure. In this case, the advantages and disadvantages of each group of funding sources should be taken into account (Table 12.2).

Own sources of financing allow the company to gain an advantage over its competitors and help reduce the costs of using additional funds and reducing risks. Activities carried out independently are called entrepreneurial. Such activities are undertaken to regularly generate profits from the use of property, sales of products, performance of any work or provision of services.

Currently, organizations themselves distribute the profits that remain at their disposal. Profits are used to further develop production and protect the interests of owners, investors and employees. If a sufficient amount of own profit is directed to the development of the enterprise, then the need for additional financing does not arise.

What are your own sources of funding? These are the financial resources of an enterprise, which, depending on the method of formation, can be internal or external (attracted). Own sources of financing include:

Internal financing is carried out through the use of financial resources generated as a result of the financial and economic functioning of the organization. External financing is distinguished by the fact that the funds raised come from outside. The sources are the founders, the state, banks, individuals and various non-financial organizations.

What are the main sources of funding for the organization? The main source of financing is the enterprise’s own capital, which includes:

• authorized capital;
• retained earnings;
• special purpose funds;
• government subsidies and grants;
• other reserves.

Over time, our own sources of financing include:

• net profit of the enterprise;
• depreciation deductions;
• leasing or selling unused assets.

Advantages and disadvantages of reinvesting your own profits:

Enterprise profit

Any enterprise strives to obtain maximum profit. The main influence on profit is exerted by production volumes (product sales) and the cost of manufactured products. Net profit is the difference between the organization's income and production costs. This is the main indicator of any business, reflecting profitability.

The amount of profit is determined by the characteristics of the organization, including the cost of production, the level of sales, the number of taxes, fees and other mandatory payments. This indicator is taken into account as a result of all operations of the enterprise:

• sales of products;
• sale of property;
• financial transactions.

Profit, which is reflected in the company’s balance sheet, is the basis for many business management decisions:

• making investments;
• formation of reserve funds;
• replenishment of working capital.

The amount of net profit is an indicator of the organization’s performance. If it increases, it means that the enterprise is working well at this stage. A decrease in profit indicators shows that problems have arisen that require an urgent solution. Financing of production growth can be done at the expense of retained earnings. Net profit is used for the following activities:

• dividend payments;
• replenishment of the organization's currency fund;
• combination of these solutions.

Depreciation deductions

Depreciation charges are the transfer of the cost of fixed assets during the standard period of their service to the cost of production. Depreciation also serves as an important source of self-financing for the enterprise. It is accrued to reimburse expenses for the acquisition of fixed assets, and is intended for investment in replacement of fixed assets that are retired due to physical or moral wear and tear. Depreciation charges depend on the cost of the organization's fixed assets and are received as part of financial resources for the sale of production products or services. The main purpose of these funds is to ensure not only simple, but also expanded reproduction.

The advantage of depreciation as a source of finance is that it is available in any financial situation and always remains at the disposal of the enterprise.

The amount of depreciation charges depends on the procedure for its calculation and is usually determined and regulated by the state. When a method for calculating these accruals is selected, it must be recorded in the organization's accounting policies and can be applied throughout the use of the fixed asset.

At the beginning of the operation of investment objects, the use of accelerated methods (declining balance, sum of numbers of years, etc.) will help increase depreciation charges, which will help increase the volume of self-financing. Under certain conditions, a competent depreciation policy helps to release funds that exceed the costs of making the investment. Adequate depreciation includes the reproduction of fixed assets, the policy in applying methods for calculating these deductions, the selection of the most important areas for their use and other factors.

In addition, additional funds for the activities of the enterprise can be raised through the sale or lease of fixed and current assets that are not used. Such financial transactions are one-time in nature and are not considered as a regular source of funds.

Where are the sources of origin of the company's resources reflected? All financial resources are reflected in the liability section of the enterprise's balance sheet.

Attracted and borrowed sources of own funds

Despite all the advantages of own sources of financing, they are usually not enough to expand production, introduce new technologies, implement investments, and so on. Therefore, own funds are additionally attracted from external sources. The advantages of external sources of financing include:

• significant amounts of capital investment;
• the possibility of increasing production efficiency;
• independent control over the use of investments.

Disadvantages of external sources of financing:

• duration and complexity of attraction and registration;
• payment of interest, dividends;
• risk of insolvency and bankruptcy;
• the likelihood of loss of property and production management.

The basis of the financial activity of the organization is the formation and use of various funds. Through these funds, the production activities of the enterprise are provided with the necessary funds, production is also expanded, new equipment is mastered and introduced, and settlements are made with the budget and banks.

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There are several sources of external financing; all funds of enterprises are divided into the following groups:

• borrowed funds– loans from banking and commercial institutions, factoring, leasing, accounts payable;
• involved funds– consumer funds, dividend payments, future income, reserves for future expenses and payments;
• operational cash– wage fund, fund for paying dividends, budget payments, etc.

Borrowed– these are funds used to finance investments on loan terms for a certain period of time, which are returned with the payment of interest. Such funds include money received from the issue of bonds, as well as loans from banks, organizations and the state.

Attracted– these are funds provided on a long-term basis, for which payments are made to the owners of these funds of income (interest, dividends). These include income from the issue of securities, additional shares in the authorized capital, government financing, etc.

Pros and cons of borrowed and attracted sources of financing:

Owners of enterprises who decide to place securities on the stock market conduct their business in such a way as to minimize possible losses from dilution of their own stake and not lose the opportunity to manage the organization. Many large shareholders manage to retain a controlling stake after a public offering of securities.

In general, today it is more convenient and profitable for enterprises to attract external loans for financing, as cheaper, simpler and more effective ways to raise capital.

Internal sources of financing of an enterprise are its own funds: profit and depreciation charges.

External sources of financing are various borrowed and attracted funds: proceeds from the issue and placement of shares, bank loans, sale of shares in the authorized capital, and so on.

Internal and external sources of financing for enterprises have their own characteristics. Thus, using its own resources for development allows the management of the enterprise to maintain independence in production activities, quickly make decisions and not incur costs for the return of funds.

However, quite often the company’s own funds cannot cover all the financing needs, and then attracting external sources is the only way to develop the company. The division of external sources of financing into borrowed and attracted capital is also not done by chance:

Borrowed capital is, as a rule, bank loans, the return of which occurs at the expense of all assets of the enterprise, while banks do not control the process of using loan funds;

Raised capital is, as a rule, an investment, the return of which should occur only through the implementation of a specific business idea for which they were raised, and their use is under the control of the investing structure.

To cover the need for fixed and working capital, in some cases it becomes necessary for an organization to attract borrowed capital. Such a need may arise for reasons beyond the organization's control. They may be the optionality of partners, emergency circumstances, reconstruction and technical re-equipment of production, lack of sufficient start-up capital, seasonality in production, procurement, processing, supply and sales of products and other reasons.

Thus, borrowed capital, borrowed financial resources are funds and other property raised to finance the development of an organization on a repayable basis. The main types of borrowed capital are: bank loan, financial leasing, commodity (commercial) loan, bond issue and others.

In modern conditions, situations arise when depreciation charges are sufficient for the expanded reproduction of fixed assets. This is most characteristically manifested when the structure of fixed assets contains a certain proportion of computer and organizational equipment. This is due to the constant reduction in prices for this equipment by several times and the simultaneous increase in its productivity.

Capital expenditures for the reproduction of fixed assets are long-term in nature and are carried out in the form of long-term investments (capital investments) for new construction, for the expansion and reconstruction of production, for technical re-equipment and for supporting the capacities of existing organizations.

Sources of the organization's own funds to finance the reproduction of fixed assets include:

Depreciation deductions;

Depreciation of intangible assets;

Profit remaining at the disposal of the organization;

Budgetary earmarks;

Funds from the issue of shares.

Objects for calculating depreciation are objects of fixed assets that are under the right of ownership of economic introduction and operational exercise. Depreciation charges on leased fixed assets are made by the lessor, with the exception of depreciation charges on property made by the lessee under the lease agreement.

Depreciation on property under a lease agreement is calculated by the lessee in the manner adopted for fixed assets owned by the organization. For fixed assets received under a donation agreement and free of charge in the process of privatization of the housing stock for external improvement objects and similar forestry, road and other objects, depreciation is not charged. Objects of fixed assets whose consumer properties do not change over time are not subject to depreciation; these are land plots and environmental management objects.

The second source of an organization's own funds to finance the reproduction of fixed assets is depreciation on intangible assets. Depreciation on intangible assets is accrued at rates determined by the organization itself. The basis for calculating the standards is the initial cost and the planned period of use of intangible assets. The actual amount of depreciation is transferred to the organization's current account along with the proceeds from the sale of products (works, services) and is in circulation.

The third source of the organization's own funds for financing the reproduction of fixed assets is the profit remaining at the disposal of the enterprise. Enterprises determine the directions for using net profit in their financial plans independently.

The fourth source of an organization's own funds to finance the reproduction of fixed assets is budgetary targeted allocations. If an organization fulfills a targeted state order, which is provided for in the state development budget, then the latter allocates targeted funding to the enterprise.

External sources of financing the reproduction of fixed assets include:

Bank loans;

Borrowed funds (bonded loans) from other organizations;

Funding from the budget on a repayable basis;

Financing from extra-budgetary funds on a repayable basis.

Bank loans are provided to an organization on the basis of a loan agreement, the loan is provided on the terms of payment, urgency, repayment against collateral: guarantees, real estate pledge, pledge of other assets of the organization.

Many organizations, regardless of their form of ownership, are created with very limited capital. This practically does not allow them to fully carry out statutory activities at their own expense and leads to their involvement in the turnover of significant credit resources.

The source of financing for the reproduction of fixed assets is also borrowed funds from other organizations, which are provided to the organization on a reimbursable or gratuitous basis with strategic interest. Loans to organizations can also be provided by individual investors (individuals).

Other sources of financing the reproduction of fixed assets are budgetary allocations on a repayable basis from state and local budgets, as well as from industry and intersectoral trust funds.

The issue of choosing sources of financing for capital investments should be decided taking into account such factors as the cost of attracted capital;

The efficiency of its return;

The ratio of equity and borrowed capital, which determines the financial condition of the organization;

The degree of risk of various sources of financing; economic interests of investors and lenders.

Financing the economic activities of an enterprise is a set of forms and methods, principles and conditions for financial support for simple and expanded reproduction.

Financing refers to the process of generating funds or, more broadly, the process of generating capital for an enterprise in all its forms.

When choosing sources of financing for an enterprise, it is necessary to solve five main problems:

Determine short- and long-term capital needs;

Identify possible changes in the composition of assets and capital in order to determine their optimal composition and structure;

Ensure continued solvency and, therefore, financial stability;

Use your own and borrowed funds with maximum profit;

Reduce the cost of financing business activities.

The classification of sources of financing is varied and can be made according to the following criteria:

· According to property relations, own and borrowed sources of financing are distinguished.

·By type of property, state resources, funds of legal entities and individuals, and foreign sources are distinguished.

·According to time characteristics, sources of financing can be divided into short-term and long-term.

Organizational forms of financing:

· Self-financing (retained earnings, depreciation, reserve capital, additional capital, etc.).

·Equity or equity financing (participation in the authorized capital, purchase of shares, etc.).

·Debt financing (bank loans, placement of bonds, leasing, etc.).

·Budget financing (loans on a repayable basis from the federal, regional and local budgets, appropriations from budgets of all levels on a gratuitous basis, targeted federal investment programs, government borrowing, etc.).

·Special forms of financing (project financing, venture financing, financing by attracting foreign capital).

·The initial source of financing for any enterprise is the authorized capital (fund), which is formed from the contributions of the founders. Specific methods of forming authorized capital depend on the organizational and legal form of the enterprise.

The founders of a joint-stock or other company are required to fully contribute the authorized capital during the first year of activity.

The decision to reduce the authorized capital is made by 2/3 of the votes of the owners of voting shares and is implemented in one of two ways:

1. Reducing the par value of shares;

2. Acquisition and redemption of part of the shares (if this is provided for by the organization’s charter).

The decision to increase the authorized capital is made by the general meeting of shareholders. This occurs either by increasing the par value of shares or by placing an additional announced issue of shares. However, to develop a business, it is not enough to have the initial capital contributed by the founders (shareholders). In the course of its activities, the enterprise needs to accumulate other available sources of financing.

The enterprise's own sources of financing are retained earnings, which is a reinvested source of own funds for replacing equipment and new investments.

The profit of an enterprise depends on the ratio of income received as a result of its activities with the expenses that provided these incomes. There are gross profit, sales profit, operating profit, profit before tax (according to accounting data), taxable profit (according to tax accounting data), retained (net) profit of the reporting period, reinvested (capitalized undistributed) profit.

The profit remaining at the disposal of the organization is a multi-purpose source of financing its needs. However, the main directions of profit distribution are accumulation and consumption, the proportions between which determine the development prospects of the enterprise.

The availability of retained earnings depends on the profitability of the joint stock company and the dividend payout ratio. The dividend payout ratio characterizes the dividend policy adopted by the organization.

Profit is also the main source of formation of reserve capital (fund).

Reserve capital is part of the equity capital allocated from profits to cover possible losses. The source of reserve capital formation is net profit, that is, the profit remaining at the disposal of the organization.

Only joint-stock companies must create a reserve fund. The minimum size of the reserve fund is 5% of the authorized capital. In this case, the amount of annual mandatory contributions to the reserve fund cannot be less than 5% of net profit until the amount established by the company’s charter is reached.

The funds of the company's reserve fund are used:

· to cover the company's losses;

Bond redemptions;

· repurchase of shares of a joint-stock company in the absence of other funds.

Reserve capital cannot be used for other purposes.

All enterprises can create reserve funds on a voluntary basis. The size and procedure for the formation of funds are established in the constituent documents.

Depreciation charges are a method of reimbursing capital spent on the creation and acquisition of depreciable assets by gradually transferring the cost of fixed assets and intangible assets to manufactured products.

The functions of depreciation are divided into economic and tax.

Tax depreciation is determined in accordance with the Law of Ukraine No. 283 “On Taxation of Profit” and from January 1, 2011, the Tax Code of Ukraine, and its role is to reduce taxable profit.

Accounting depreciation may be greater than tax depreciation, depending on how it is determined under current accounting standards.

Depreciation charges for fixed assets are included in the cost of production according to established standards to the book value of fixed assets. Fixed assets are grouped depending on their useful life, and depreciation rates are applied to the cost of each group.

The chosen method of calculating depreciation is fixed in the accounting policy of the organization and is applied throughout the entire service life of the fixed asset.

For tax accounting purposes, depreciation on fixed assets is carried out using tax legislation.

Depreciation also pays off the value of intangible assets.

Additional capital is a specific own source of financing for the organization's enterprise. Unlike the authorized capital, it is not divided into shares (shares) and shows the common ownership of all participants (shareholders).

The formation and increase of additional capital can be carried out in the following cases:

1. Upon receipt of share premium.

2. When revaluing fixed assets.

3. If exchange rate differences arise as a result of the formation of authorized capital expressed in foreign currency.

4. When receiving targeted investment funds from the budget to finance capital investments (for non-profit organizations). Sources of financial resources that are equivalent to one’s own also include funds received through redistribution: insurance compensation for incidents that occurred, funds from extra-budgetary funds (to pay for sick leave, vouchers to sanatoriums, etc.) and other revenues.

“Loan capital is funds from third parties) provided to an enterprise on a long-term basis. Although this is a long-term, but temporary source of financing.”

Thus, in a market economy, the variety of attracted sources of financing for a company increases. The company, depending on its position, can choose the most suitable one.