Financial Management- Critical Thinking

Small businesses need short-term financing for day-to-day operations. One of the primary short-term funds’ sources is trade credit, which is the most widely used source of funds by small businesses (Nickels et al., 2012). Small companies often approach their suppliers and promise to pay after a specific time. However, the suppliers check the businesses’ credit history, and sometimes the businesses are required to sign up a promissory note citing the amount and payable at which time. The second source is family and friends. Sometimes they borrow from family and friends if the bills are not too high. However, such funds can create chaos, especially if they do not understand anything to do with cash flow. The last source is commercial banks. Due to many businesses approaching banks, the banks prefer to give short-term loans to long-term.

Businesses get long-term funding from two sources. The first is debt financing which involves borrowing from lending institutions or issuing bonds. When borrowing from lending institutions, long-term means paying the loan in installments and for a period between three to seven years, or some goes up to twenty years depending on the amount of funds involved. Issuing of bonds is applied when a business is unable to borrow from lending institutions. Some organizations that issue bonds are corporations, state, federal, local governments, and government agencies.

The finance manager is influential in the success of a business. Even if a firm has a trained accountant, the financial manager needs to understand accounting information. The primary reason is that when they understand accounting information, they make sound financial decisions. The accountant’s role is to prepare financial records, while a financial manager interprets the documents and makes recommendations. Due to that, the finance manager must understand the accounting information to interpret the records and make sound recommendations effectively. The responsibility of a financial manager is to obtain and control funds. It, therefore, means that understanding the accounts of the business is crucial as the responsibility relies on the accounting information. However, the primary reason is to make sound financial decisions.

Firms generally prefer long term-financing to obtain funds rather than issuing shares of stock due to three main reasons. The first one is that the process of selling stock to the public is not easy or automatic. The US Securities and Exchange Commission (SEC) and some state agencies have set out some requirements that each company seeking to sell stock to the public must meet (Nickels et al., 2012). The requirements make it hard for companies to sell the stock. Secondly, the decision to sell shares to the public is made by the owners of the firm. It is a challenging process as if a firm has more than one owner, they all have to agree on one thing. It is difficult because not everyone might agree with the decision, which may cause chaos or disagreements. Lastly, one disadvantage of issuing shares of stock is that those who buy the stock become owners of the organization. It is risky because they can control the organization against the will of the owners. On the contrary, obtaining funds through long-term financing is easy as a business only needs to approach a lending institution, sign a promissory note, and receive the funds. Also, the organization only has to adhere to the requirements that the lending institution has put in place. Hence, firms prefer long-term financing rather than issuing shares of stock.

References

Nickels, W. C., Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2012). Understanding business.