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Assess How the Source of Finance Impacts a Businesses Ability to Achieve Its Financial Objectives

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Assess how the source of finance impacts a businesses ability to achieve its financial objectives (20 marks)

There are five financial objectives, which are influenced by internal and external sources of finance. These five financial objectives are: liquidity, solvency, efficiency, profitability and growth. Internal sources of finance come from within the business and include retained profits. External sources of finance can be classified into two forms. Debt or equity. Debt is categorised as short term or long term. Short-term debts include; overdrafts, commercial bills and factoring, whereas long-term debts include; mortgages, debentures, unsecured notes and leasing. Equity can be issued through ordinary shares or through private equity.

Liquidity is the ability to pay current liabilities with current assets. The ratio used to measure the liquidity of a business is the current ratio (current assets divided by current liabilities). An accepted ratio is 2:1, meaning the business has $2 of current assets for every $1 of current liability. In order to improve the current ratio, current assets must increase and current liabilities must decrease. This can be done through selling a non-current asset to increase cash. To decrease current liabilities, current liabilities should be added to the mortgage. A mortgage has low interest rates in comparison to overdrafts, which means the business is paying less interest, which means total liabilities will decrease. Another ratio used to measure the liquidity of a business is the quick ratio (cash divided by current liabilities). The quick ratio proves the available funds to cover current liabilities. The quick ratio is a more accurate way of measuring liquidity because if a business has lots of current assets, but majority of the current assets are accounts receivable or stock the business cannot pay off its current…...

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