The importance of internal sources

Date: 2015-10-07; view: 564.

Sources of financing : special features in Russia

Picture 1 Number of enterprises by economic activities in 2013

To run their business activities organizations use different types of funding sources. They can be divided into internal and external. Internal sources of financing are usually related to some types of resources generated in the course of economic activity, such as accumulated retained earnings, profits from operations, depreciation and others. Regarding external forms of finance we can name such kinds as "receiving a grant of financial assistance from budgetary and extra-budgetary sources, the involvement of bank and non-bank loans, etc."[9] According to another classification external sources of financing include "funds raised in the financial market, and received in the order of distribution (for example, insurance compensation for risks, dividends and interest on securities of other issuers)”[10]

A large proportion of funding for small and medium-sized businesses is related to internal sources. For example, in the United States retained earnings are often used as means of financing for working capital (58 %) and capital expenditures (47%). It is important to note that the retained earnings as a source of working capital financing is most important for companies whose assets are up to 100 thousand $ and to finance capital investments retained earnings is mainly used by organizations with assets of more than 1 million $. In the Russian Federation retained earnings is the main domestic source of funding for the company (61.3%) in 2012. The second largest source is personal savings of the organizations or funds earned in other firms (29.7%). In the third place are bank loans (15.8%). (See Fig. 2) Bank loans is one of the most popular sources of funding, but not the most accessible due to the rather strict conditions for consideration of applications for loans and that's why it is on the 3rd place. Organizations are likely to finance its activities from their own profits because it is easier and cheaper if they have this opportunity. The SME organizations that just entering the market have roughly the same structure of funding. The first exception are retained earnings that are not included in the source of finance .On the first place there are savings and property of owners and the second - loans of friends and family.