Financial Management - External Funding, Flow of Funds, and Interest Rates
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1.) Explain the process to calculate external funding needs and the importance to a business.
2.) Define the flow of funds model provided in this unit, explain each component and how funds flow from savers to producers.
3.) Explain the importance of interest rates, and how risk is considered to businesses and economic activity.
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The expert examines external funding, flow of finds and interest rates.
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1. Calculating the external funding needed is important to a business because the extra funds needed will help the business invest in a project or some other asset to help grow the business and maximize shareholder or owner's wealth. In addition, when you know what extra amount is needed, the finance manager can develop a strategy to get the external funds in the most cost effective manner possible. According to Smith (2012), there are seven steps to calculating external funding:
a. Divide the current assets by current sales.
b. Multiply the quotient by the difference between current sales and your forecast future sales. This will give you the required increase in retained earnings.
c. Divide the net income by sales to get the profit margin.
d. Divide the current ...
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