Financial resources are the funds and assets that finance an organisation’s activities and investments. In simple terms, financial resources are the monies that keep a business operating, and there are several ways a business will raise and use its financial resources.
Every organisation will have a framework or process in place for planning, organising, directing, controlling, and monitoring its financial resources and activities in order to deliver on the goals of the business. This is known as financial resource management (FRM) or financial management.
What are the two types of financial resources?
Internal financial resources
Internal sources of finance are funds that come from within a business. Examples include profits generated by the business, retained earnings, capital funding, and liquid assets. Liquid assets are business assets that can be easily converted into cash.
Because internal financial resources are generated from within the organisation, they are interest-free. This is typically considered to be more economical from a business point of view because it means the organisation doesn’t have to pay interest – which would apply to borrowed capital and debt – granting the business a stronger financial position.
External financial resources
External sources of finance are funds that come from outside a business. Examples include loans and credit from external sources, such as banks.
External financial resources are particularly helpful for new businesses, organisations that are looking to grow and expand, and businesses that are looking for new investors to provide funding and even guidance and expertise within the organisation. It’s worth noting, however, that these sources of funding can mean partial loss of ownership within the business, as well as the added cost of interest payments.
Sources of finance: what are some examples of financial resources?
Financial institutions
Banks and other financial institutions are a common source of external finance for businesses. Lenders and financial services can offer business financing and loans in addition to advice and guidance. According to Association of Chartered Certified Accountants (ACCA), the global body for professional accountants, bank loans are among the most common forms of finance for small and medium-size businesses. Bank loans in this context are also known as commercial loans or business loans.
Capital markets
Capital markets include the stock market and the bond market. They effectively funnel savings and investment funding from people and institutions with capital to lend and invest into businesses that are seeking capital. In exchange, investors aim to receive a return on their investment through price appreciation – an increase in the value of their investment – and dividends.
An organisation’s capital stock is the number of shares it is authorised to issue within the market, as recorded on its balance sheet and determined by its corporate charter. By issuing capital stock, a business can raise funds without incurring debt or needing to pay interest, but it also means diluting its control over the organisation.
Venture capital
Venture capital is an increasingly popular form of business financing, particularly for small businesses and startups. It is a form of private equity that typically comes from private investors, or investment banks. Venture capital investing can be a high-risk/high-reward scenario for investors. Similarly for businesses, accepting capital investments can mean gaining access to funding that might be otherwise unavailable through the more traditional financial system – loans or capital financial markets – but also typically grants investors equity in the business, which means more fingers in the organisation’s decision-making pie.
Trade credit
While not technically a form of funding, trade credit is a valuable financial resource for businesses. It is a business-to-business (B2B) agreement that enables a company to purchase the goods or services needed to run the business, but pay the counterparties – suppliers or providers – at a later date, typically within 30, 60, or 90 days. These interest-free partnerships allow the business to increase its assets and then deliver on its payment at a time that should, preferably, be more suitable for the organisation.
Government grants and subsidies
Governments are often a valuable source of funding for businesses, providing grants, loans, and other forms of support to help organisations grow and succeed.
In the United Kingdom, for example, both the national government and local authorities offer a number of schemes and programmes to help businesses, including:
- small business grants
- tax relief
- apprentice-training grants
How are financial resources used?
Financial resources are used in a number of ways, but they typically cover the cost of doing business and turning a profit – also known as corporate finance. This includes:
- purchasing supplies
- building inventory
- paying human resources (staff)
- site costs such as office rentals or the purchase of properties and buildings
The allocation and use of resources within a business will be determined by the people or team tasked with financial resource and funding management.
Financial resource management
Financial resource management, or financial management, is typically overseen by an individual, such as a chief financial officer (CFO) or finance manager, a dedicated team or department, or a hired third-party such as a chartered accountant. This person or team influences or manages all financial activities within a business, from how funds are procured and used, to the processes in place for accounting, payments, and risk assessments. They are often accountable to their organisation’s shareholders and other stakeholders who expect adequate returns and prudent decision making.
What are the main areas of financial management?
- Financial controls – this includes managing the organisation’s balance sheet, profit and loss statement, financial forecast, capital budgeting, cash flow statement, derivatives, valuations, and so on.
- Resources – this includes determining how financial resources are raised, allocated, and used.
- Risk management – this includes identifying and analysing potential financial risks and liabilities connected to the business, and then determining a course of action based on the organisation’s objectives, its tolerance and appetite for risk, and its financial performance, health, and sustainability.
- Strategy and planning – this includes financial planning, strategic planning, and business planning, and looking at everything from financial inputs to management processes.
- Performance – this includes monitoring financial activities and metrics to ensure good financial health, and acting to solve issues as they arise.
Learn how to manage financial resources and risk
Advance your career with the University of York’s flexible Master of Business Administration (MBA). This distance learning degree is taught part-time and 100% online, which means you can learn around your current professional commitments and apply your studies to your existing career. It also includes a key module in managing financial resources and risk, with a focus on the interpretation of financial statements, investment and funding decisions, and a range of possible financial risks for businesses.
