Term financial resources refers to all finacial resources availbale for use in organisation. They are a part of company's liquid assets, which are usually used as business continuity funds, to provide continious runnig of all processes in the organisation (Pride W., HughesR., Kapoor J. 2009, p.9).
Financial resources are the funds at the disposal of the enterprise and intended for the implementation of the current costs and expenses for expanded reproduction, for the fulfillment of financial obligations and economic incentives for employees. Financial resources are also directed to the maintenance and development of non-production objects, consumption, accumulation, to special reserve funds, etc (Broadbent M., Cullen J. 2003, p.4).
There are a lot of types of funding exist and their usage are commonly depends on the size of organization. As financial resources represent company's ability to borrow, but also represent all assests invested into the enterprise, we can devide all company's financial resources into 3 categories (Tesar G., Kuada J. 2013, p. 70):
- Liquid funds which include cash, cash equivalents like checks and bank deposits;
- Financial capital of organisation – total of all corporate investments;
- Other financial resources.
Formation of financial resources
The formation of financial resources is carried out at the expense of a number of sources. On the basis of property rights, two major groups of sources can be distinguished: own and borrowed funds. Or there is also a more detailed classification of financial resources, that can be provided: own and equivalent funds; resources mobilized in the financial market; cash receipts in the order of redistribution (Rose C. 2012, pp.351-352).
The initial formation of financial resources occurs at the time of the establishment of the enterprise, when the authorized capital (equity or venture capital) is formed. The authorized capital is the property of the enterprise, created at the expense of the contributions of the founders.
This type of funds is formed mainly due to profits (from the main and other types of activities), as well as proceeds from the sale of retired property, stable liabilities, various earmarked revenues, share and other contributions of members of the labor collective (Rose C. 2012, p.353). Sustainable liabilities include authorized, venture and other types of capital; long-term loans; payables that are constantly in the company's turnover (for salary due to the difference in terms of accrual and payment, for extrabudgetary funds, to the budget, for settlements with customers and suppliers, etc.) (Bendrey M., Hussey R., West C. 1996, pp.16-21).
Substantial financial resources, especially in newly created and reconstructed enterprises, can be mobilized on the financial market through the sale of shares, bonds and other types of securities issued by this enterprise; dividends and interest on securities of other issuers, income from financial transactions, loans.
Enterprises can receive financial resources (Tirole J. 2006, s. 80):
- from associations and concerns to which they belong;
- from the parent organizations while maintaining sectoral structures;
- from government in the form of budget subsidies;
- from insurance organizations;
- from long or short-term debts;
- from lending against assets.
The composition of this group of financial resources, formed in the order of redistribution, plays an increasingly important role in the payment of insurance indemnities, in comparison to budget and industry financial sources, which are intended for a strictly limited list of costs.
Financial resources usage
The use of financial resources of an organisation is carried out in the following areas:
- current costs of production and sales of products (works, services) (Hindelang S. 2009, pp. 45-47);
- capital investments related to the expansion of production and its technical renewal, the use of intangible assets;
- investment of financial resources in security (of data mostly);
- payments to third-party companies, which provide services and licenses for the organisation;
- the formation of various monetary funds and reserves (for development; incentive and social nature);
- charity, sponsorship, social responsibilty etc.
Main functions of financial resources
Deeper understanding of an organization’s finances is disclosed in their objectives, which coordinate financial management system. Financial resources of organisation perform mainly three functions (Wyman O. 2017, pp.24-25.):
- distributive (stimulating);
- serving (reproductive).
- Distributive function. This funcion mostly participates in the process of income distribution, as with it's help all incomes and funds that are in place at the enterprise in order to fulfill monetary obligations to counterparties, personnel, budget and creditors are formed and used. Proper distribution of funds has a stimulating effect on improving the work of the company.
- Reproductive function. The function of servicing the movement of income of an organization is the second function that reveals the content of the enterprise’s finances. Since the movement of income of an enterprise is associated with the resumption of consumed resources, this function is often called reproductive. The presence of this function is associated with the need to ensure the continuous movement of income in the process of economic activity of the enterprise. Movement of income depends on the conformity of the flow of material and monetary resources, which ensures stable economic activities of the organization.
- Financial controlling. This function monitors financial conditions of an organisation and verify the effectiveness of its activities. For example, monitoring the level of profitability allows to determine the degree of effectiveness of the economic activities of the organization. Inside the organisation money control the quality and quantity of labor, the use of non-current and current assets, etc. Also financial resources control economic activity of the enterprise, in terms of fulfilling its obligations to the budget. The control function can be performed in two ways:
- financial indicators in the accounting - statistics and operational reports;
- financial impact, which is carried out with the help of economic levers and incentives (taxes, benefits, subsidies, etc.).
- Broadbent M., Cullen J. (2003). Managing Financial Resources, Butterworth-Heiman, Burlington, pp.4, 11-13.
- Bendrey M., Hussey R., West C. (1996). Accounting and Finance in Business, Thomson Publishing, Stanford, pp.16-21.
- Hindelang S. (2009). The Free Movement of Capital and Foreign Direct Investment, Oxford University Press, Oxford, New York, pp. 45-47.
- Pride W., HughesR., Kapoor J. (2009). Business, Cengage Learning, Mason, p.9
- Rose C. (2012). Principles of management and administration, Asoke K. Gosh, Delhi, pp.351-365.
- Tesar G., Kuada J. (2013). Marketing Management and Strategy, Routledge, New York, p. 70.
- Tirole J. (2006). The Theory of Corporate Finance, Princeton University Press, New Jersey, p. 80.
- Wyman O. (2017). Financial Resource Management,Marsh&McLennan Companies, New York, pp.24-25.
Author: Veronika Tomilova