DEFINITION OF FINANCIAL RESOURCES

Generally, in life, we need to have something as a source or way in which we have to use to get other things in life. Therefore, in business we need to have money to start a business. It could be from our pocket or loan from other sources to finance the business. Resources in business could be physical, financial, human and information. These are necessary ingredients for a successful business. This unit focuses on the definition of finance.

OBJECTIVES

At the end of this unit, you should be able to:

• explain the meaning of financial resources 
• explain cash inflow: acquiring financial resources 
• explain cash outflow using financial resources 
• explain intra-firm cash flow:moving resources within the firm. 

Meaning of Financial Resources

Financial resources are valuables that could be used to acquire other resources to aid earning more resources. As mentioned in our introduction, physical resources are used for the purpose for which they were acquired, for instance, a building and a machine. While financial resources can be used to pay salaries, buy equipment, pay for advertisements, or buy other company, it is very important for any business venture to have enough financial resources to reinvest, raise or increase its prospect of growth.

Financial resources can best be discussed in the angle of its flow. This can be seen in form of cash flow into, through, and out of the business. Cash flow means the movement of cash from outside the business into the business, and out of the business. The cash inflow could be in form of sales of the business products while cash outflow could be in form of buying of raw materials, or payment of salaries. Intra-cash flow means the movement of cash within the organisation from one department to the other.

SELF-ASSESSMENT EXERCISE 1

• Explain what you understand by financial resources. 

Cash Flow: Acquiring Financial Resources

The primary sources of cash inflow could be from the owner of the business, lenders, and customers of the business. For instance, when the sources of finance is from the owner of the business, it is called equity financing, while for those lenders it is called debt financing and the other, which comes from sales, is called revenue financing.

Any money the owners invested in a company is called equity financing. In small businesses, the owners may invest their personal funds, raised through friends, and relatives: in the case of bigger companies or corporations, funds could be raised by selling stock. The stockholders become co-owners of the business for money they invested through the stock they bought.

However, money loaned to the business by outsiders such as individuals, banks, or other lending institutions is called debt financing. These people are not co-owners of the business, but they are creditors, which the business needs to pay back the loaned amount on a specified period with interest.

A significant source of fund is that which is raised though revenue realised by the business. This cash is generated by selling the products or services of the business to raise this revenue. This money is then used to create more goods to be sold. A successful company means more fund will be raised through its revenue, which will be generated through the sales of the products. The revenue will also provide returns for the owners and the excess will be reinvested in the business.

SELF-ASSESSMENT EXERCISE 2

• Identify and explain the three sources of financing. 

Cash Outflow: Using Financial Resources

Any amount of money that leaves the business for whatever transaction is classified as cash outflow, that is, money leaving the business. For instance, if the business buys or pays for a service rendered to it, such money is considered a cash outflow. Sometimes, the outflow of fund could be for productive purpose, this type of cash outflow is termed outflow for operation. While the cash that goes out for investment is called outflow for financing investment.

In business, the large chunk of its funds go out for purchases such as utilities, supplies and miscellaneous item that will be used to further improve the operation of the business; others are used for salaries and taxes.

When a business buys new fixed asset or pays principal and interest on loan; pay dividend to stockholders who are stakeholders in the business, or returns to the owner in case of one-man business, then, cash has flown out from the business for investment. These monies are classified as outflow for financing investment.

SELF-ASSESSMENT EXERCISE 3

• Mention and explain the different cash outflow in business. ii. Identify the differences between cash outflow for operation and cash outflow for investment. 

 Intra-Firm Cash Flow: Moving Resources Within the Firm

Cash at times might not leave the business but move from one department to the other within the organisation. This movement might not involve physical cash but writing of cheque or paper work to record transactions between departments reflecting the direction of the goods,

which means an equivalent movement of cash in the opposite direction. Big companies (which has several units within the company) mostly practiced the intra-firm cash flow. This movement of cash is made possible through papers or receipts rather than cash. For instance, in a company such as NASCO Group of Companies Ltd Jos, which has more than 20 units within the company where a unit can buy the products of another unit as an input for it production. The company may not need to use cash; rather it uses cheque or receipt to settle transaction between the departments. For instance, when the biscuit unit buys cartons from the packing unit of NASCO, this transaction might not have involved cash, but there is movement of resources within the firm.

CONCLUSION

Cash flows are necessary whether the flow is inflow, outflow, and/or intra-firm flow. These movements keep the business better off as each of the movement creates an increase in the business profit. Therefore, financial resource is significant in any business being the only valuable that can be used to acquire other resources.

SUMMARY

Financial resources are very crucial to any business because, it is the lifeline upon which all forms of businesses depend. The ways and manners in which these funds are managed are also significant in the life of a business. Monies are invested in a business to expand and to circulate cash in, out or within the company. Any disconnect in the flow of money in an organisation creates crises, which may result in winding-up of the venture.