Critically reflect on the importance of external financing requirements. What key factors must be considered when determining external financing requirements?

Financing is an integral part of any business’s operations, considering that almost all businesses require money at some point in order to function properly and remain competitive. External financing is a form of financial capital obtained from sources other than the company itself which can be used for various purposes such as purchasing assets, developing new products or expanding into foreign markets. In order to make informed decisions about external financing requirements, it is important to understand both the benefits and potential drawbacks of such an arrangement.

One key factor that must be considered when determining external financing requirements relates to cost – specifically, the associated costs with obtaining funds through debt or equity investments. Issuing additional equity securities may lower existing shareholders’ ownership stake but also allows them more control over the decision-making process whereas taking on debt could increase short-term liabilities if not managed carefully and efficiently. Additionally, tax implications should also be taken into account depending on what type of external funding source is being sought after.

Another consideration related to external financing involves agency conflict between stakeholders and management teams who are tasked with making decisions regarding capital investment opportunities. Agency conflict arises due to gaps in information asymmetry between parties and often manifests itself in three ways: principal–agent problem (where managers fail to act in shareholders’ best interests), shareholder–stakeholder problem (if management fails to consider mutually beneficial outcomes across multiple stakeholder groups) or manager–labor problem (when labor unions challenge executive compensation structures). To illustrate this concept further, consider a public company which engages in mergers & acquisitions activities: while management may benefit financially from stock price appreciation due shares issued during M&A transactions, existing shareholders may face dilution meaning their ownership stakes decline slightly over time.

In conclusion, external financing should always be acquired with caution since improper use could potentially create long-term problems for a business including strained relationships among stakeholders as well as higher risk levels stemming from excessive leverage or ownership concentration among major investors. It is critical for businesses seeking outside funding sources find suitable partners whose goals align with their own objectives so as maximize return on investment whilst minimizing agency conflicts between parties involved. With proper planning backed by sound strategies based on detailed research – along with strong oversight mechanisms put place – companies can unlock their true potential through strategic deployment capital resources available externally without running any unnecessary risks.

Appendices

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• https://owl.purdue.edu/owl – Purdue OWL Website<