The Accounting and Finance

Question: Discuss about the Accounting and Finance ? Answer : Introducation Financial needs of the business depends upon its type and size. Retail business requires less capital and on the other hand, substantial amount of capital is required by processing business. It is necessary for start up to take into account several areas such as starting investment in capacity, initial set up cost, growth and development and working capital. Equity and debt are the most important source of financing start up business (Brigham Ehrhardt, 2013). Equity financing is the process of raising capital through selling of shares in an enterprise. It is essentially the process of raising funds for selling of an ownership interest. It involves a permanent investment in the company. Debt financing on the other hand, is the process of buying money and involves borrowing funds from with the stipulation of borrowed funds along with interest at specified future time. This is the traditional method of raising funds for startup business. Current activities or operations are financed using short-term debt and financing of business assets are done using long-term debt (Titman et al., 2014). Equity financing comes with several advantages and disadvantages. Using equity finance involves less burdening on business, as there is no liability of making monthly payments. Equity is preferable if the business does not enjoy good credit worthiness. It comes with the advantage of retaining equity in the business. Disadvantage of equity financing: Equity financing involve sharing of control of company and it is regarded as one of potential disadvantage. Business needs to share its profit with the investors in dividend form. Advantage of debt financing: Debt financing provides the business with tax advantage as the amount of interest paid is tax deductible and net obligation is reduced effectively. Debt financers would not relinquish any ownership or retaining of control in the business. Disadvantage of debt financing: Borrowing money represents financing the business against future earnings that is this involves an allocation of future profits for repaying debts. Financing using debt would affect the credit rating of company as the borrower needs to higher interest rate if borrowing increases. Retained earnings- Future expansion of business can be financed by reinvestment of business earnings. Business can reinvest such earning for future growth. It makes the company less dependent on others for funds and contributes to companys stability. Advantage of retained earnings: Using retained earnings helps to determine growth potentially of business and determine their financial health. This would be useful for investors seeking investment in the company (Lasher, 2013). It also helps in funding several other projects of company such as research and development, paying off liabilities and purchasing equipments. Disadvantage of retained earnings: Retained earnings does not provide the company with advantage of taxation. It is quite possible to miss the business opportunities for building up necessary funds if retained earnings are used in business. Factoring- It is a third party funding source for raising capital where the business sell its account receivable at discounts. This source frees up working capital, provide fast cash for meeting financial needs of business, and does not involve collateral (Frank Pamela, 2016). However, factoring comes with cost as third party charge interest on cash balance. Recommendation: Equity financial should be used for staring up any new business and retained earnings is considered more reliable when expanding future business. Reference: Brigham, E. F., Ehrhardt, M. C. (2013).Financial management: Theory practice. Cengage Learning. Frank, J. F., Pamela, P. P. (2016). Financial Management and Analysis. Lasher, W. R. (2013).Practical financial management. Nelson Education. Titman, S., Martin, J. D., Keown, A. J. (2014). Financial Management Principles.