The concept of funding sources
Ensuring the development of the company includes the financing of various business transactions. To do this, the firm can use the resources that were attracted from different sources. In economic practice, there are two main sources of funding:
1. Internal sources of financing;
2. External source of financing (borrowed and borrowed funds);
To detail the sources of funding, we propose to consider Figure 1.
Internal funding is the mobilization of own financial resources, which are formed in the course of the enterprise's activities. The main sources of internal financing are: net profit, depreciation, debts of creditors, various reserves and income from the sale of property.
External funding- is the use of funds for the activities of the enterprise, which are received from external counterparties. In turn, external financing is divided into borrowed and borrowed funds. Subjects external funding can act: financial - credit organizations, the state, legal and individuals and others.
The figure below shows the systematization of the main sources of financing for the enterprise.
The main problem of Russian industrial enterprises is the depreciated state of fixed production assets. Funds are subject to both physical and moral obsolescence. In the case of renewal of fixed assets, one of milestones is the choice of funding source. In economic practice, the following sources of financing are distinguished:
* Internal financing (net profit, sale of assets, depreciation);
* Raised funds (investments, sale of shares and securities);
* Borrowed funds (credit, leasing, promissory note);
* Mixed financing.
Domestic funding
Sources of funding is complex economic category, because in the process of economic activity they are transformed into material, intellectual, technical, innovative and other types of resources. In terms of their attraction, they are divided into internal and external. In the context of the unstable economic situation, attracting external sources of financing is problematic, therefore, business entities are guided in their financial activities by attracting internal sources of financing.
The internal sources of financing of business entities include net profit; depreciation, provision for future expenses and payments.
Net profit is the property of the founders (participants). Its unused part is reflected in section I of the balance sheet liability "Retained earnings". In the future, he is sent to replenish his own current assets, the formation of long-term assets, as well as the formation of reserve capital, material incentives and social development.
Depreciation charges are accumulated during the operation of fixed assets. Depreciation calculations are usually used to purchase new or replace worn-out long-term assets, intangible assets, technical innovations and other qualitative and quantitative upgrades of the production capacities of enterprises. Similarly, depreciation can be used to repair damaged assets.
Ensuring future expenses and payments are created on the own initiative of the enterprise. The effect of financing through the provision of subsequent payments is manifested due to the existence of a time gap between the moment of their formation and use.
External funding
The basis of the functioning of the loan is the movement of value in the sphere of exchange, during which there is a gap in time between the movement of goods and its monetary equivalent. If the movement of commodity flows outstrips the movement of cash flows, then enterprises-consumers of goods, with the onset of payment for them, do not always have sufficient funds to pay for the purchased goods, as a result of which manufacturers experience a lack of funds, which can stop the production process. Therefore, they have a need for borrowed funds. Credit relations may also arise in connection with the peculiarities of production, untimely settlements and other circumstances.
Sources of capital borrowing by business entities are diverse. They can be attracted both on credit and on stock market, from business entities, the state, as well as owners and employees of the enterprise.
According to the forms of lending, loans are commodity and cash. Commodity credit is a form of commercial credit in which the lender transfers the goods to the borrower under an agreement that provides for a promissory note at the time of the final settlement. The object of a monetary loan is funds in national or foreign currencies.
Loans are of the following types:
- financial (bank loans and loans from financial and credit organizations);
- commercial (as a rule, a short-term loan from one enterprise to another, which is provided in the form of a deferred payment for goods, robots, services).
- Leasing is a loan that is issued by fixed assets, and which is concluded by drawing up a leasing agreement.
Special sources of external financing include financing from the owners of the enterprise or the sale of a share in the company. Often such sources are referred to as an internal source of external financing. It includes additional contributions by participants of a share in the company, the sale of shares on the stock market, and others.
The owners of the enterprise can contribute additional financial resources through non-refundable investments, or through retained earnings. Such financing is a priority, since in this case the company is not a debtor for external counterparties.
The sale of the company's shares can be carried out in different forms. The company can also pay dividends in the form of shares.
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When analyzing capital structure decisions, it is important to distinguish between internal and external sources of funding. Internal financing (internal financing) of the development of the company is provided at the expense of its income. It includes sources such as retained earnings accrued but not paid wage or accounts payable. If the firm invests its profits in the construction of a new building or the purchase of equipment, then this is an example of internal financing. Corporate managers turn to external financing when they raise funds from creditors or shareholders. If a corporation finances the purchase of new equipment or the construction of an enterprise with funds from a bond or stock issue, then this is an example of external financing.
The specifics of internal and external financing of the company's activities also affect the features of the financial decisions made. For joint stock company, which occupies a stable position in its business and does not intend to significantly expand it with the attraction of significant funds, decisions on financial matters are accepted, as they say, in working order and almost automatically. In this case, the financial policy consists in pursuing a well-defined dividend policy, for example, establishing the regularity of payments to shareholders in the form of dividends of one-third (or another part) of profits. In addition, the financial policy affects the maintenance of the bank's credit line i.e. ensuring the established stable needs of the corporation in credit resources within the limits agreed with the bank. It usually takes managers less time and effort to make these kinds of internal fixing decisions than with external funding; they do not require such careful consideration.
If a corporation raises funds from external sources that may be needed for a large-scale expansion of its business, management decisions are more complex and require, accordingly, high costs time. External investors usually want to see detailed plans for how their funds will be used, and they also want to make sure that companies' investment projects will generate cash flows sufficient to cover costs and make a profit. They carefully study the plans of the corporation and are more skeptical about the prospects for success than its managers. Thus, the use of external financing puts the company in close dependence on the capital market, access to which is associated with higher requirements for the investment plans of the corporation than the use of internal financing sources.
8.3. Internal and external sources of financing.
Internal sources of financing, their limitations (at the expense of profit, depreciation, increase in accounts payable, factoring, package financing).
There are several options for using internal company funds to finance innovative projects.
1) One of the main sources is the retained earnings of the company, which remains after the payment of dividends from net profit. However, many firms do not have sufficient profits to finance innovation.
2) Depreciation charges, despite being included in the cost price, represent cash remaining at the disposal of the company. Their use to finance innovation is also acceptable, but in this case, the renewal of fixed assets not related to innovation is reduced and the total percentage of depreciation of fixed assets increases.
Innovative firms can apply accelerated depreciation methods. Small firms are also allowed in the first year of equipment operation to write off additionally as depreciation deductions up to 50% of the initial cost of the active part of fixed assets with a service life of more than three years.
3) Another possibility is the firm's existing assets. Formed for the implementation of some projects, these assets can be used for others. For example, Chrysler has increased the share of using its own funds in the implementation of the next innovative project for the release of a new minivan model by using the technologies and components it already has. The most important engine and transmission mechanisms were taken from the Dodge Omni and Plymouth Horizon models.
A company that implements innovative projects has a certain material base that can be reused - these are laboratory equipment, premises, information technology.
It is also possible to sell unused equipment at market prices (so that the proceeds can be used for innovative projects).
4) The company can increase its short-term liabilities as a source of financing for innovative projects. In this case, the period between the receipt of materials and their payment, as well as between the receipt of an advance payment and shipment, increases. Such a policy can worsen the business image of the firm. Some buyers will refuse to cooperate with the company, other partners will begin to impose more stringent requirements on it - increase the prices of materials, include fines for stitching in contracts, demand more expensive forms of payment - letters of credit, etc.
5) Accounts receivable can be reduced, for example, by selling the right of collection (under an agreement factoring). It should also be done with care so as not to cause a decline in sales, since for many buyers an important condition is the provision of a delay in payment.
6) Financing a long-term innovation project from the proceeds of a parallel short-term project(s) synchronized with expected project costs, also called project packaging.
Even for large corporations, it is difficult and risky to finance large-scale innovative projects from internal sources (this leads to a dangerous outflow of funds from the core business). Therefore, funds received from outside become the most important source.
External sources of financing. Additional issue of shares.
The company can raise additional funds either by increasing share capital (an additional issue of shares) or by obtaining borrowed funds.
An additional issue allows you to attract financial capital without increasing the amount of the principal debt. It can be carried out in the form of public offering and targeted placement among individuals and companies. The first form is characteristic of companies with a well-established reputation that are already stably operating on the market.
The second form is typical for:
1) for young firms and venture capital companies that are unable to take long-term loans. Venture funds become buyers of shares. In the US, these are SBICs - companies investing in small business and venture capital (Perkins, Kleiner). The state often provides tax incentives to such funds.
2) companies that wish to remain closed. Buyers of shares here are investor groups (buyout groups), such as Kohlberg, Kravis, Poberts (KKR).
3) companies planning changes in the capital structure, change of ownership:
Repurchase of a controlling stake at the expense of creditors (LBO), acquisition by managers of a controlling stake in their own company (MBO).
Buyers of shares act as intermediaries. They may be SBICs or limited partnerships. In the US, a limited partnership or limited partnership formed with the participation of an investor. Intermediaries conduct an examination, select an innovative project and carry out subsequent monitoring of the company's activities. Investors are private and state pension funds, investment funds, individuals, financial holdings, insurance companies, banks, etc.
Bank lending, investment and corporate loans.
Borrowing funds to finance innovation activities is carried out by obtaining loans and issuing bonds.
Lending by banks and investment funds may be
1) specialized (design). The Bank issues funds for a specific project and controls the use of allocated funds.
2) corporate. All activities of the company as a whole are credited.
It is believed that it is rational for a company to take a loan in parts, to conclude an agreement on the allocation of a credit line.
An innovative project requires a long-term loan (more than 1 year). However, this kind of loans is difficult to obtain: banks take a long time to consider it, a durable, reliable collateral is needed - real estate, new equipment.
A short-term loan can be obtained at the pre-production stage and the launch of a new product, when there are already certain results of the previous stages.
The issue of bonds is associated with a number of difficulties: the duration of registration of the issue with the Federal Securities Commission; full purchase of all issued bonds by investors is not guaranteed, they may have to be sold at a discount (which will reduce the amount of funds received).
State financing, financing from off-budget funds.
In its most general form, the existing system of budgetary financing of the innovation sphere is presented below:
1. Basic financing of the strategic core.
1.1. Academic sector, higher education.
1.2. State. scientific centers, laboratories.
1.3. Unique objects of experimental base.
2. Priority directions of scientific and technical progress. Contracts for the implementation of state orders.
2.1. Federal innovation programs.
2.3. State. scientific and technical programs.
3. Target budget funds. Grants.
3.1. Russian Foundation for Basic Research.
3.2. Russian Humanitarian Science Foundation.
3.3. Fund for Assistance to the Development of Small Enterprises in the Scientific and Technical Sphere.
3.4. Federal Fund for Industrial Innovation???
Russian Fund for Technological Development (RFTD) - off-budget fund, which is formed from those deductions that enterprises, exempting these deductions from taxes, direct to industry funds, off-budget R&D funds and head organizations that coordinate their activities. It is formed at the expense of 25% of deductions from the funds collected by industry funds. Extrabudgetary funds are used to finance R&D to create new types of science-intensive products, raw materials and materials; development of new and improvement of applied technologies, measures to improve the technical level of products; work on standardization, certification and licensing of products, as well as in the field of labor protection and safety; development of normative and structural materials and etc.
Created in accordance with the Decree of the President of the Russian Federation "On urgent measures to preserve the scientific and technical potential of the Russian Federation" dated April 27, 1992 No. 1 426. Extra-budgetary funds are formed at the expense of quarterly voluntary contributions from enterprises and organizations, regardless of ownership, in the amount of 1.5% of the cost of sold products, and the amount of deductions is included by enterprises in the cost of production.
Extra-budgetary sectoral funds were formed by ministries, departments, concerns, corporations and associations at the expense of deductions by enterprises of funds in the amount of 1.5% of the cost of their commercial products (works, services). In turn, the RFTR budget was formed by deductions of 25% of the funds from extra-budgetary funds. After the entry into force of Chapter 25 of the second part of the Tax Code of the Russian Federation and the introduction of a number of amendments to it, off-budget R&D funds began to be formed at the expense of voluntary contributions from enterprises up to 0.5% of gross profit. The change in the method of deductions to off-budget R&D funds actually meant a reduction in the amount of payments to the RFTR by almost two times (for the industries from which funds are collected). As a result of the regulatory and legal changes that have taken place, in 2004 RFTR has funds left only to fulfill obligations under previously concluded agreements, but not to finance new projects.
The right to participate in the competition are commercial highly effective innovative projects, primarily related to the development of the economy, in which the innovator invests at least 20% of his own funds and the payback period of which does not exceed two years. Projects for the competition are submitted to the Ministry of Economy of the Russian Federation and must contain: a business plan and conclusions of the state environmental expertise, state non-departmental or independent expertise.
With all the variety of sources of financing for investment activities, the main ones are currently the company's own funds, which are supplemented by borrowed funds.
The most important sources of the company's own funds for financing investment activities are net profit and depreciation. Profit in the conditions of market relations is the main generalizing indicator of the financial activity of the enterprise. The source of investment is not the entire profit of the enterprise, but only the net profit.
Net profit is the profit remaining at the disposal of the enterprise after paying taxes and other payments from profits to the budget. Part of the net profit of the enterprise in the form of an accumulation fund can be directed by the enterprise to capital investments in production and social character as well as environmental protection measures.
The second major domestic source of investment financing is depreciation. It is necessary to distinguish between own and internal sources of financial resources. Own sources include, as already noted, depreciation and part of the net profit of the enterprise. Internal sources of capital accumulation is a broader concept than the concept of own sources. Internal sources of accumulation of money capital may include both own and borrowed sources.
To internal sources of financial resources of the enterprise relate:
Depreciation deductions;
Profit;
Contributions to the repair fund;
Unused balances of special and earmarked funds;
Accounts payable permanently at the disposal of an economic entity;
The increase in value from the revaluation of fixed assets.
At the same time, the repair fund, the fund for special and targeted purposes, and accounts payable are sources of financing for simple reproduction.
Thus, the enterprise's own sources are used for expanded reproduction, while internal sources are used to finance both expanded and simple reproduction.
The main source of investment activity of the enterprise is profit and depreciation. In accordance with tax code RF (part II), income is recognized as income reduced by the amount of expenses incurred.
In this case, income includes:
Income from the sale of goods (works, services) and property rights;
non-operating income.
Sales revenue includes:
Revenue from the sale of goods (works, services), as own production, and previously acquired;
Proceeds from the sale of property (including securities);
Property rights.
Profit Loss) from the sale of products (works, services) is defined as the difference between the proceeds from the sale in current prices (excluding VAT and excises) and the costs of production and sale of products.
Profit from non-operating income - this is profit from non-sales operations, i.e. from operations not directly related to the main activity: renting out property, income from the company's securities, excess of received fines over paid ones, profit from joint activities, etc.
The amount of profit of the enterprise is influenced by many factors, both external and internal (see Fig. 8).
Rice. 8. Classification of factors affecting the amount of profit
External factors include:
natural conditions;
State regulation of prices, tariffs, interest rates, tax rates and benefits, penalties, etc.
These factors do not depend on the activities of the enterprise, but can have a significant impact on the amount of profit. Thus, the constant growth of tariffs for the use of electricity, gas, water, telephone, etc. increases the costs of the enterprise for the production of products, and consequently, reduces profits.
Negatively affects the amount of profit and the tax rate on profits. In accordance with the Tax Code of the Russian Federation (part II), the tax rate on income is set at 24%, while the amount of tax calculated at a tax rate of 7.5% is credited to the federal budget, the amount of tax calculated at a tax rate of 14.5% is credited to the budget of the constituent entities of the Russian Federation, and the remaining 2% is credited to local budgets.
Internal factors influencing the amount of profit are divided into production and non-production. Production factors subdivided into:
Extensive;
Intensive.
Extensive factors affect the change in the amount of profit by increasing the volume of investments of the enterprise in the production of products (works, services).
Intensive factors affect the increase in profits through qualitative changes in production: growth in labor productivity, the use of new materials and technologies; progressive equipment; better organization of production and management, etc.
Non-production factors include, for example, environmental protection, improvement of living and working conditions of workers, and so on.
All factors, both external and internal, are interrelated and interdependent and affect the costs of the enterprise and, ultimately, the amount of profit of the enterprise, and consequently, the intensity of its investment activity.
The second important internal source of funds for investment is depreciation deductions of the enterprise from the use of fixed assets and intangible assets. The amount of depreciation deductions depends on the initial cost of fixed assets and intangible assets, their terms beneficial use and methods for calculating depreciation.
In order to bring the initial cost of fixed assets in line with the real situation, taking into account inflation, their annual revaluation is carried out. The revaluation of fixed assets has a significant impact on the results of the production and economic activities of the enterprise, which leads to a change in the amount of depreciation.
Big influence the amount of depreciation is affected by their accelerated depreciation. Accelerated depreciation in the Russian Federation is applied to fixed assets used to increase the output of computer technology, new progressive types of materials and equipment, expand product exports, as well as in cases where worn-out and obsolete equipment is replaced with a new one. With the introduction of accelerated depreciation, enterprises increase the annual rate of depreciation, but not more than twice.
Accelerated depreciation makes it possible to more quickly transfer the cost of fixed assets to production costs and contributes to the faster replacement of obsolete equipment with new, progressive equipment, which ultimately leads to an increase in the competitiveness of products.
The Tax Code of the Russian Federation (part II) provides for accelerated depreciation in respect of depreciable fixed assets used to work in an aggressive environment and (or) increased shifts. For these fixed assets, a special coefficient is also applied to the basic depreciation rate, but not higher than 2.
At the same time, an aggressive environment is understood as a combination of natural and (or) artificial factors, the influence of which causes increased wear (aging) of fixed assets during their operation. To work in aggressive environment the presence of fixed assets in contact with an explosive, flammable, toxic or other aggressive technological environment, which can serve as a cause (source) of initiating an emergency, is also equated.
For depreciable fixed assets that are the subject of a financial lease agreement (leasing agreement), a factor of 3 can be applied to the basic depreciation rate. However, this provision does not apply to fixed assets belonging to the first, second and third depreciation groups, if depreciation is charged on them by non-linear method.
For cars and passenger minibuses with an initial cost of more than 300 thousand rubles and 400 thousand rubles, respectively, the basic depreciation rate is applied with a special coefficient of 0.5.
In order to develop small business in the Russian Federation, it is allowed in the first year of operation of small enterprises, along with the use of accelerated depreciation, to additionally write off as depreciation deductions up to 50% of the initial cost of fixed assets with a service life of up to three years.
According to the place of origin, the financial resources of the enterprise are classified into:
domestic financing;
external funding.
Internal financing involves the use of those financial resources, the sources of which are formed in the process of financial and economic activities of the organization. An example of such sources is net profit, depreciation, accounts payable, reserves for future expenses and payments, and deferred income.
With external financing, funds are used that come into the organization from the outside world. Founders, citizens, the state, financial and credit organizations, non-financial organizations can be sources of external financing.
The financial resources of the organization, unlike material and labor, are fungible and susceptible to inflation and devaluation.
The following sources of funding are distinguished:
Internal sources of the enterprise (net profit, depreciation, sale or lease of unused assets).
Attracted funds (foreign investments).
Borrowed funds (credit, leasing, promissory notes).
Mixed (complex, combined) financing.
Internal sources of financing of the enterprise
In modern conditions, enterprises independently distribute the profits remaining at their disposal. Rational use of profits involves taking into account factors such as the implementation of plans further development enterprises, as well as respecting the interests of owners, investors and employees.
The advantages of internal financing of the enterprise include the absence of additional costs associated with raising capital from external sources, and maintaining control over the activities of the enterprise by the owner. The disadvantage of this type of financing of the enterprise is that it is not always possible to use it in practice.
The second internal source of financing is the profit of the enterprise remaining after taxes. As practice shows, most enterprises do not have enough of their own internal resources to upgrade fixed assets.
Involved funds
Credit - a loan in cash or commodity form, provided by the lender to the borrower on a repayment basis, most often with the payment of interest by the borrower for using the loan. This form of funding is the most common.
Loan benefits:
the credit form of financing is more independent in the use of the funds received without any special conditions;
most often, a loan is offered by a bank serving a particular enterprise, so that the process of obtaining a loan becomes very operational.
The disadvantages of a loan include the following:
the loan term in rare cases exceeds 3 years, which is unbearable for enterprises aimed at long-term profit;
to obtain a loan, an enterprise requires the provision of collateral, often equivalent to the amount of the loan itself;
in some cases, banks offer to open a current account as one of the conditions for bank lending, which is not always beneficial for the enterprise;
With this form of financing, an enterprise can use the standard depreciation scheme for purchased equipment, which obliges to pay property tax during the entire period of use.
Leasing is a special complex form of entrepreneurial activity that allows one side - the lessee - to effectively update fixed assets, and the other - the lessor - to expand the boundaries of activities on mutually beneficial terms for both parties.
Advantages of leasing:
Leasing involves 100% lending and does not require you to start payments immediately. When using a conventional loan to purchase property, the company must pay about 15% of the cost at its own expense.
Leasing allows an enterprise that does not have significant financial resources to start implementing a large project.
It is much easier for an enterprise to obtain a leasing contract than a loan, because the equipment itself serves as the collateral for the transaction.
A leasing agreement is more flexible than a loan. A loan always involves a limited size and repayment period. When leasing, an enterprise can calculate the receipt of its income and work out with the lessor an appropriate financing scheme that is convenient for it. Repayment can be made from funds received from the sale of products that are produced on equipment leased. Additional opportunities open up for the enterprise to expand production capacity: payments under a leasing agreement are distributed over the entire term of the agreement and, thereby, additional funds are released for investment in other types of assets.
Leasing does not increase the debt in the company's balance sheet and does not affect the ratio of own and borrowed funds, i.e. does not reduce the company's ability to obtain additional loans. It is very important that the equipment purchased under a leasing agreement may not be listed on the balance sheet of the lessee during the entire term of the agreement, which means that it does not increase assets, which exempts the enterprise from paying taxes on acquired fixed assets.
Leasing payments paid by the enterprise are fully charged to production costs. If the property received under leasing is taken into account on the balance sheet of the lessee, then the enterprise can receive benefits associated with the possibility of accelerated depreciation of the leased asset. Depreciation charges for such property may be charged on the basis of its value and norms approved in the prescribed manner, increased by a factor not exceeding 3.
Leasing companies, unlike banks, do not need collateral if the property or equipment is liquid on the secondary market.
Leasing allows an enterprise, on completely legal grounds, to minimize taxation, and also to attribute all expenses for equipment maintenance to the lessor.
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