Critically reflect on the importance of external financing requirements. What key factors must be considered when determining external financing requirements?

Two page essay about external financing

External Financing

Financing is an integral part of any business’s operations, considering that almost all businesses require money at some point in order to function properly and remain competitive. External financing can be a source of capital from other sources than the company. It is used to purchase assets, develop new products and expand into international markets. To make educated decisions regarding external financing, you need to know both the advantages and disadvantages.

One key factor that must be considered when determining external financing requirements relates to cost – specifically, the associated costs with obtaining funds through debt or equity investments. Issuing additional equity securities may lower existing shareholders’ ownership stake but also allows them more control over the decision-making process whereas taking on debt could increase short-term liabilities if not managed carefully and efficiently. Tax consequences should be also considered, depending on which type of external financing source is sought.

Agency conflict is another consideration in external financing. This refers to management and stakeholders who have the responsibility of making capital investment decisions. Agency conflict arises due to gaps in information asymmetry between parties and often manifests itself in three ways: principal–agent problem (where managers fail to act in shareholders’ best interests), shareholder–stakeholder problem (if management fails to consider mutually beneficial outcomes across multiple stakeholder groups) or manager–labor problem (when labor unions challenge executive compensation structures). To illustrate this concept further, consider a public company which engages in mergers & acquisitions activities: while management may benefit financially from stock price appreciation due shares issued during M&A transactions, existing shareholders may face dilution meaning their ownership stakes decline slightly over time.

External financing must be used with care as improper usage can cause long-term issues for businesses. This includes strained relationships between stakeholders and higher risk due to excessive leverage or concentration of ownership among large investors. Companies seeking funding from outside sources must find partners who share their objectives to maximise return on investments and reduce agency conflicts. With proper planning backed by sound strategies based on detailed research – along with strong oversight mechanisms put place – companies can unlock their true potential through strategic deployment capital resources available externally without running any unnecessary risks.

Appendices

One main requirement was to review the outline and understand grammar mechanics. Lectures helped reduce errors.

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