Prof. Dr. Zulfiqar Hasan

Financing is an important activities of finance. This topic discusses the process of making decision to choose debt financing or equity financing by a business organization. Topic also covers the annual report and its different elements. 

Annual Report

A report issued annually by a corporation to its stockholders is called annual report. An annual report is a brief profile on the health of a company.

Items in An Annual Report:

01. Verbal Section

a.  A letter/Speech from the chairman on the high points of business in the past year with predictions for the next year.

b. Details Report/Company's philosophy: a section that describes how the company does business.

c. An auditors' letter/Certificate confirming that all of the information provided in the report is accurate and has been certified by independent accountants.

02. Data Section: Financial information:

Income Statement: A company's income statement is a record of its earnings or losses for a given period

Balance sheet: provides a snapshot of a firm’s financial position at one point in time.

Statement of retained earnings: shows how much of the firm’s earnings were retained, rather than paid out as dividends.

Statement of cash flows: reports the impact of a firm’s activities on cash flows over a given period of time.

Process of Financing

Financing means collection of capital for the business organization. Fundamental ways of financing are two:

01. Debt Financing and

02. Equity Financing

Debt Financing:

Debt financing means borrowing money that is to be repaid over a period of time, usually with interest.

Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over more than one year.

A type of Financing through the selling of a debt instrument is called Debt Financing

Equity Financing:

Equity financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt; in other words, without having to repay a specific amount of money at any particular time.

The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.

Raising money for company activities by selling common or preferred stock to individual or institutional investors.

Financing for New Project

Project finance is the funding of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.